One Sure Thing: Death to Taxes

In Argentina, pots and pans have many uses. Brandished over the hearth, they can conjure some of the world's finest cuisine. Deployed in the streets, they can bring down governments. So in late March, when thousands of protesters took to the pavement in Buenos Aires, clanging their kitchenware in anger over scorching new taxes on farm goods that had sent growers on strike and emptied supermarket shelves across the country, many Argentines held their breath.

It's one thing when provincials are grousing, and quite another when well-dressed citizens in tony Buenos Aires make a clatter. After all, just six years ago, with the economy floundering, deafening cacerolazos helped topple the hapless regime of President Fernando de la Rúa after two stormy years in office. Is the same fate in store for Cristina Fernández de Kirchner, who succeeded her husband as Argentina's president in December? Not for now. After three weeks of stinging rhetoric from both sides, the farmers ended their strike on April 2, on promises of renewed dialogue and a sprinkling of concessions, such as farm credit and transport subsidies. But the farming feud may be a sign of the times. The bloom is off the Kirchners' rose, and the days of Latin America's famous tolerance for governments' helping themselves to the national larder may finally be fading. Taxpayer unrest is spreading, and if the row in the Pampas is any indication, governments will have to contain their appetites for taxing and spending, or face a whirlwind of turbulence.

Grousing about taxes is as old as Latin America itself. Resentment over the Portuguese crown's levy of 20 percent of the bounty from colonial gold mines—"the fifth from hell," the settlers called it—fed a rebellion that led to Brazil's independence in 1822. Gaucho hero Martín Güemes is venerated for his fight to free Argentina from Spain, as well as his battle to keep Buenos Aires's hands out of provincial affairs and pockets. Two centuries later, little seems to have changed. While governments in places like Brazil and Honduras have paid down their debts and deficits, they have often relied on tax hikes to do so rather than cutting spending. A thorough fiscal reform would help but with rare exceptions (Uruguay, Colombia), attempts to repair onerous tax systems have stalled in national legislatures, perhaps because so many of today's lawmakers hope to be tomorrow's big-spending mayors, governors and presidents.

So now ordinary citizens and business leaders are striking back. In Brazil, a movement by middle-class taxpayers pushed Congress to strike down a $22 billion-a-year levy on banking transactions last December. The Brazilian rebels are now pressing to require vendors to reveal each of the cascade of levies that inflate the final price of goods and services. Much of Bolivia's recent political upheaval centers on La Paz's attempt to stop wealthy provinces in the fertile, gas-and-oil rich lowlands from declaring tax autonomy, and to tighten the central government's reins on local revenues. And while Argentina's farmers backed down this time, the cacerolazos made a din heard from La Rioja to La Recoleta.

Each of these conflicts has its own politics and peculiarities, but they all reflect the fatigue of citizens who see taxes as an excessive and growing burden. Although Latin America's overall tax burden of 18 percent of GDP is about 7 points below the global average—thanks to inefficient collection and the vast off-the-books economies—it is rising steeply in every country but Mexico. Taxes went from just over 12 percent of Latin American GDP in 1990 to more than 18 percent in 2006, according to the Economic Commission on Latin America and the Caribbean. The tax bite is especially fierce in two of the largest economies in the region. Argentines pay 30 percent of their earnings to federal, provincial and local taxes, up by half just since 2002. Brazilians must work five months of the year just to honor their debts to the government, which takes 36 percent of the national wealth in taxes, against 25 percent in the mid-'90s. Argentines refer to their tax collectors as "los sabuesos," or bloodhounds, while the Brazilians joke bitterly about feeding "the lion."

Many of these taxpayers are starting to realize their power. In Argentina, enterprising farmers helped turned the swath of South America into a global breadbasket, producing one of the world's largest harvests of corn and soy. Their superharvests were vital to resuscitating the economy, which collapsed in 2002, and continue to pump the government treasury full of hard currency. But instead of cutting them a break, the Kirchner government turned the screws tighter, raising taxes on soybeans from 35 percent to 44 percent—and that rate will climb higher if soybean prices rise. One of the farmers' rallying cries in the recent protests was "Farming saved the country from crisis, not the Kirchners." Add on the country's general 35 percent income-tax rate, and the farm levy "amounts to a confiscation of all profits," says Pablo Guidotti, a former deputy Argentine Finance minister.

Farmers are not the only ones with a beef. The São Paulo Chamber of Commerce, which represents small and medium-size firms, created a "taximeter," an electronic display in the city's financial district that flashes the swelling national tax burden. Owners of small and medium-size businesses in countries like Chile, Mexico and Peru are calling for lowering the soaring taxes that push scores of businesses into the underground economy. Latin American companies pay 57 percent of their profits in taxes, which is higher than the world average of 52 percent, and far above Asia's emerging markets, where businesses pay 38 percent of their profits. Only African companies pay more. And while most nations have been steadily slashing taxes, most Latin nations have cut taxes only slightly or raised them, says Rita Ramalho, of the World Bank.

Latin Americans might be more forgiving of such high taxes if the governments they are forced to feed returned the favor in public goods. But public investment lags behind that of Asia, and even Africa, and has fallen in the last decade from 5.8 percent to 5.1 percent of GDP, compared with 8 percent in Asia and Africa. "In country after country, roads are crumbling, railways are atrocious and ports are clogged," says Walter Molano, of BCP Securities, an emerging-market investment bank. "But instead of investing in infrastructure, populist governments have used their tax boom to increase [public] employment." Now that is something to bang pots and pans about.

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