Tax Rebellion in Argentina

By MARY ANASTASIA O'GRADY

Violence broke out in Buenos Aires last week when demonstrators protesting food shortages and inflation were set upon by stick-wielding supporters of President Cristina Kirchner. The attackers were led by a sworn enemy of the private sector who was once an official in former President Nestor Kirchner's government.

"The only thing that motivates me," Luis D'elía said, after his assault on a protestor was caught on camera and his actions were justified by Mrs. Kirchner's chief of cabinet, "is hatred against the whorish oligarchs." He then announced that he and his men would patrol the city streets to defend their view that the country's producers are immoral. National police, who answer to the president, did nothing to quell the violence.

Americas Columnist Mary Anastasia O'Grady comments on a political rebellion in Argentina.

Argentina has been growing fast -- better than 8% a year -- since 2003. But this has largely been the result of the combination of a natural bounce after a collapse and a global boom in commodities. Meanwhile, simmering just beneath the surface of the recovery remains the fundamental contradiction that provoked the 2001 economic crisis. To wit, while a strong peso made Argentines prosperous in the 1990s, it was incompatible with the rigid, closed economy. The situation is the same today: Either the economy is opened, labor markets are made flexible and the business climate improves or the government clings to a weak peso policy as a way to compensate for an uncompetitive economic model and inflation comes back. Take your pick.

By choosing the latter, the Kirchners have won the support of that segment of the Argentine economy loyal to the principles of 20th-century fascist Juan Peron. These include labor militants, government bureaucrats, the Peronist political machine and the likes of Mr. D'elía, whose thugs act as Mrs. Kirchner's informal enforcers. But by generating inflation and provoking shortages Kirchneromics is also fueling widespread discontent.

The recent trouble began not in Buenos Aires but in the provinces, where agriculture is the main economic activity. Farmers rebelled earlier this month when the government announced an increase in export taxes on agricultural products. Claims that the government's new "retention" rates -- aka export taxes -- are close to an expropriation are not without merit.

Take, for example, soy beans. The new export tax will be raised to 44% from 35%. But since farmers also have to pay a 35% income tax on profits, the effective tax rate is significantly higher. "The farmer ends up paying essentially a 63% tax on gross income," says Pablo Guidotti, dean of the school of government at Argentina's DiTella University. If the price of soy goes up, Mr. Guidotti adds, the "retention rate" increases until the government can end up taking as much as 95% of any marginal increase in farmers' gross income.

In response to the tax increases, farmers have blocked roads in some 300 locations around the country, pledging not to allow their goods to reach markets. The effects of the action have been felt in the capital, where demonstrators have taken to the streets in sympathy for the farmers and against what they say is government arrogance. The strike is now in its third week.

Mrs. Kirchner says the tax increase is a redistribution mechanism, suggesting that growers and ranchers have to be forced to share more of their good fortune with others. But the greater motivation behind the export-tax increase is inflation.

This government, it seems, will do just about anything to reduce inflation except the one thing that would solve the problem: Let the peso strengthen. It has imposed price controls on businesses; frozen, and then subsidized, energy prices; and prohibited the export of beef. Last year it fired the director of the government's agency for inflation data because she refused to fudge the numbers. Even so, prices rose by an estimated 20% in 2007 and expectations for this year remain high. This would explain the new round of confiscatory export taxes. By discouraging farmers from sending food abroad, the government thinks it can increase food supplies inside the country and damp prices.

While making farmers furious and reducing the incentive to produce, this does nothing to address the causes of the inflation, which are monetary expansion and the failure of the economy to attract investment and expand productive capacity. A strong peso and a commitment from the government to respect private property are what's needed to confront rising prices.

Instead, like loyal minions desperate to plug holes in a leaky dike, Mrs. Kirchner's economics team is running around trying to compensate for the many Kirchner policy errors without freeing the economy. The inflation crisis is only the latest fiasco. Subsidies to offset the new export taxes cannot be far behind.

But never mind. Kirchner power does not lie in a rational economic model. The first couple's idea of running an economy is to tax, prohibit, regulate, subsidize and otherwise micromanage every aspect of Argentine life so that no decision can be made without checking first with them. They are, at bottom, unreconstructed authoritarians.

If you doubt this, consider the fact that Mr. Kirchner spent the past five years dismantling institutional checks and balances so that when this moment came, all the power would be in the presidential palace. He and his wife now control the judiciary, the legislature, the central bank, the national police and discretionary spending in the provinces. The only avenue left open to express dissent is civil disobedience.

As we saw last week, that path may be closing down too since the Kirchners now have their own military on the streets of Buenos Aires, led by Mr. D'elía. The anger and envy behind the rage of this mob is what kirchnerismo has sown since 2002. Those who dare to differ are likely to be met with more savagery.