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Why We Might Get Tax Reform

For incredibly cynical and corrupt reasons.

Feb 11, 2013, Vol. 18, No. 21 • By IKE BRANNON
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Argentina hasn’t always been a basket case: In the early 1990s the country embarked on a radical privatization of government assets, with the result being a decade of strong growth and foreign investment. Much of the successes of that time have been reversed, but the story of how the statist Peronista party came to embrace such a radically pro-market agenda contains a political message for our country today, namely that sometimes the conditions are ripe for politicians to do the right things for the wrong reasons. And that is precisely why tax reform may now be feasible.

Before Carlos Menem was elected president of the country in 1989, he had the résumé that one would expect of a corrupt, quasi-socialist party hack. As governor of La Rioja, a populous province, he ensured his reelection by dramatically expanding government jobs until a majority of households in that province had at least someone on the government payroll.

However, when he assumed the presidency this was no longer an option: His predecessors had pursued the same strategy for decades at the national level, to the extent that the country was broke and dysfunctional. To cite just one example, businessmen in downtown Buenos Aires, despairing of ever getting the state-owned telephone company to fix their lines, had resorted to sending messages via carrier pigeon at one point.

Enter President Menem, slightly shocked at the depths to which things had sunk and finding himself in a spot where his campaign supporters expected certain .  .  . favors to be done for them. In an environment in which every government business was hemorrhaging money, it was difficult to siphon off much more for one’s cronies.

Menem’s advisers quickly hit on a solution: Sell government assets and take a kickback on the proceeds from the sale. With the Soviet Union crumbling, privatization was in the air all over the world, so it wasn’t an outlandish proposal at the time, although for Menem to be the instigator of such a reform was a bit incongruous.

Menem’s plan passed the legislature and became law, and Argentina began privatizing everything, not just factories and phone companies but also the post office, water and electric utilities, and even some roads. The government collected a significant amount of revenue, the privatized businesses greatly improved service and productivity, and the economy began to function again. The 1990s were a period of exceptional economic growth for the country, with significant capital inflows creating an investment boom.

It didn’t last, of course, owing to an overvalued currency tied to the dollar and a structural deficit that privatization revenues obscured for a number of years. The government was loath to tackle either one until the two combined to throw the country into a deep recession, which led to Argentina’s breaking its dollar-peso peg, defaulting on its bonds, and ushering in the populist, incompetent governments of the Kirchner husband-and-wife team that have reigned the last decade.

What does this have to do with the need for tax reform here? Plenty. Despite rhetoric to the contrary, comprehensive tax reform has very little momentum, mainly because the act involves taking away credits, deductions, and exemptions that greatly benefit a few highly motivated recipients and giving the masses a fairer and more pro-growth tax code. In the long run this benefits everyone, but in the short run these gains would be difficult to discern—while the losers in this game would be ready to spend all sorts of resources to make the lives of the congressmen who gored their sacred cows a living hell. Why would anyone want to do that?

For the same reason that Menem’s Peronista party went along with his massive privatization scheme: because it sets the table for a new round of graft—err, I mean, campaign contributions and other favors. As things now stand it has become exceedingly difficult for a member of one of the tax-writing committees to secure a break for a particular cause, whether it is a nascent industry or a valued constituent. If such raw power cannot be exercised, then raising money is much more difficult: A member of the Senate Finance Committee can get only so much money from protecting sacred cows—there’s more money in creating them from scratch.

With a clean tax code, free of the encrusted credits and deductions and exemptions from decades gone by, members can start doing favors all over again, no doubt beginning by restoring some of the breaks they’ve just removed. Of course, the current string of trillion-dollar deficits would make ladling out tax breaks more difficult—but easier than such a thing is today.

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