Financial Freedom in the Argentine Informal Economy
"In a country where half of its population is below the poverty line, there is no place for bureaucratic positions with ostentatious salaries and hereditary positions..."
Upon taking office in December, Javier Milei inherited a state that had spent beyond its means for years, printing money to finance the fiscal deficit and fueling inflation. Inflation was soaring, foreign reserves were empty, and another default seemed almost inevitable. The libertarian president rose to power by blaming the "caste," Argentina's political establishment and unions, for the mess.
Throughout his first year in office, Mr Milei devoted his time to fighting real (and imaginary) enemies threatening the sacred objective of achieving fiscal surplus. It has already been the turn of retirees and pensioners, public universities, and now it is the turn of the Argentine tax agency 'Administración Federal de Ingresos Públicos' (AFIP).
To be fair, since before he took office Mr. Milei has been arguing that the Argentine tax system is overly burdensome and inefficient. And he has a point. He contends that high taxes stifle economic growth, discourage investment, and contribute to the country's persistent inflation and debt problems. An estimated 40% of the country's workers work in the so-called informal economy, where transactions are at least partly and at worst totally off the books and untaxed. This sector includes street vendors, unregistered businesses, and others working without formal contracts or social security contributions. Meanwhile, half of the population is below the poverty line. Tax policies are constantly changing and dealing with the revenue agency is a maze with no way out. Clearly, things are not working as they should, and Mr. Milei has set out to change that.
Dismantling the Unnecessary Bureaucracy
To eradicate this problem at its root, Mr. Milei decided to shutter the AFIP tax collection agency and replace it with ‘Agencia de Recaudación y Control Aduanero’ (ARCA). The agency will see 34% reduction in staffing levels, including the removal of most of the middle management positions.
The Office of the President said that the closure of the AFIP ‘is essential to dismantle the unnecessary bureaucracy that has hindered the economic and commercial freedom of Argentines’, sparking significant controversy and debate.
The new entity will maintain AFIP's current dual role of overseeing tax collection and customs monitoring, while more than 3,000 AFIP agents who joined during former president Alberto Fernández’s 2019-2023 government will be laid off as part of a strong reduction of current staffing levels.
Milei’s Presidential Behavior
This fight is neither isolated nor an outrage. President Milei has implemented a series of budget-cutting measures since taking office last December, including the elimination or downgrading of several ministries and state agencies.
Obviously, Mr. Milei is not in Office to make new friends. He used his first presidential veto to overturn pension increases, in what proved to be his most unpopular move since taking office. A huge cut in the budget for public universities has also generated friction with student groups, who in response have taken to the streets to demonstrate their opposition.
“Nothing will stand in the way of fiscal balance,”
Milei says, unmoved by the demonstrations.
Public transport strikes, street protests, and teachers' strikes are now commonplace on the streets of Buenos Aires. And of course, the AFIP restructuring will be no exception: “We are going to mobilize and we will take more measures as soon as we know the details. The most worrying thing is the 3,100 jobs of our colleagues," said AFIP union chief Pablo Flores, who represents AFIP employees.
Seeking Financial Freedom
On the one hand, the restructuring of an agency that had a strong image of corruption and for years operated as a political cash cow for the government-of-the-day can only be good news. During 2023, when the country was almost completely closed to imports of goods and services, numerous scandals pointed to the agency along with the trade ministry as operators of a corruption network. Even so, justice turned a deaf ear.
In a country where half of its population is below the poverty line, there is no place for bureaucratic positions with ostentatious salaries and hereditary positions that hinder the production and growth of the country's productive industries.
For those citizens who, like me, work hard for their financial freedom, this seems to be a step in the right direction, regardless of the extravagances of the government. However, Argentines also know that reducing AFIP staff and changing its name does not solve the underlying problem: 40% of the Argentine economy is informal. Until the tax system is simplified and adapted and the necessary measures are taken to incorporate this gigantic volume of workers into the formal framework, it will be very difficult to solve the problems that have historically plagued the country.
As with many of the measures adopted by the libertarian government, it has good intentions, but it remains to be seen what real effects it will have on the ground. The presidential spokesman ended his speech announcing the closure of AFIP by saying: “The Argentina fiscal voracity is over. What belongs to every Argentine is theirs and no one else’s. No state bureaucrat should have the power to tell them what to do with their property.”
Sounds good, doesn’t it?
