Argentina's 2017 tax reform demonstrates that even well-designed, carefully negotiated fiscal reforms can fail to deliver results if they lack the political credibility needed to convince investors and firms that the changes will endure.
Editor’s note: You can listen to this podcast on Spotify, Apple Podcasts, or wherever else you get your podcasts. You can also watch this conversation on YouTube.
In this episode of VoxDevTalks, Sebastian Galiani offers rare insight on what it takes to redesign a country's tax system under fiscal pressure, political constraints, and chronic economic volatility. Drawing on his experience as Argentina's Deputy Minister of Treasury, Galiani reflects on the logic of the reforms, the compromises required to pass them, and why credibility ultimately proved as important as technical design.
Argentina's economy on the eve of reform
When Macri took office in late 2015, Argentina's economy was burdened by years of populist fiscal expansion. The previous government had increased the size of the state by 17 percentage points of GDP and raised the tax burden by 11 percentage points, while simultaneously suppressing the exchange rate and holding down energy prices to mask underlying inflation. The result was a heavily distorted economy with a primary fiscal deficit that, on some measures, reached as high as 8% of GDP.
"You can get up to 8% of GDP deficit, which is an unsustainable anywhere but certainly in Argentina, with a long history of many defaults and no access to capital market."
Macri won the 2015 election by a narrow margin, and took office with only 19% of the Senate and 34% of the lower house. Governing as a minority meant that every reform required negotiation, and the scope for bold unilateral action was tightly constrained from the outset.
A tax system full of distortions
Galiani describes the pre-reform tax system as riddled with inefficiencies. Corporate income tax stood at 35% – by a wide margin the highest in the region – while the personal income tax, the backbone of any well-functioning system, was relatively small as a share of total revenue. Local governments, lacking sufficient revenue from efficient taxes, had resorted to a cascading sales tax known as ingresos brutos, under which goods were taxed at each stage of the supply chain, compounding distortions throughout the economy.
"Some taxes that are extremely distortive, bad taxes, essentially [have] a serious problem, as personal income tax is not that large [of] a share of total revenue as it should be, and that forced government – both the federal and local governments – to use some other taxes that are less efficient."
Miscellaneous levies on alcohol, sugar, and energy had also accrued over time with little internal coherence: wine attracted no tax at all, while water was taxed at 4%.
Designing a revenue-neutral reform
Given the existing fiscal deficit and prior commitments to tax reductions already in the pipeline, the reform team designed the package to be revenue-neutral. Implementation was spread across five years, a deliberate political choice intended to signal continuity to investors who, if they believed Macri would be re-elected, would factor the future tax path into their investment decisions.
The centrepiece was a phased reduction of the corporate income tax from 35% to 25%, but only on reinvested profits. Dividends paid out would still attract a top-up levy restoring the effective rate to 35%, ensuring the reform was designed to stimulate investment rather than simply reduce the overall tax take. Inflation adjustment was introduced for corporate assets, with escape clauses built in should disinflation stall.
On labour, the team created a payroll tax deduction equivalent to the minimum wage, targeted specifically at unskilled workers in an economy where half the labour force operates informally. This was offset by removing poorly designed existing exemptions tied to geographic proximity to the capital – incentives that evidence suggested were producing few of their intended effects.
Negotiating with the provinces
The reform's most arduous dimension was striking a deal with Argentina's provincial governments, who collected their own taxes and controlled votes in Congress. Rather than approach governors directly, Galiani's team engaged provincial finance ministers – technocrats more closely aligned with the goal of rationalising the ingresos brutos system. The midterm elections of 2017, in which Macri performed well, created the political conditions for agreement: provinces began to foresee re-election and responded to the federal government's leverage over discretionary transfers.
"It's not just being a good negotiator. Yes, of course it matters... but to sit them on the table, and to be willing to agree is a political decision that was driven by the electoral result."
Trade-offs were unavoidable. In one instance, a province that produced sugar withheld congressional votes for pension reform until the government dropped a proposed sugar tax. Galiani is candid about such compromises: "you have to have priorities."
The macroeconomic shocks of 2018
The reforms were legislated at the end of 2017 and had begun implementation when three overlapping shocks derailed the stabilisation programme. First, the government publicly revised its inflation target from 10% to 15%, which markets interpreted as political interference with the central bank and triggered a sharp rise in borrowing costs. Second, a severe drought cut agricultural output by an estimated two percentage points of GDP. Third, rising US interest rates prompted capital outflows across emerging markets – but Argentina, with a larger deficit and weaker fiscal position than peers such as Brazil and Turkey, was hit hardest.
"Argentina was fiscally worse than Brazil and Turkey, and it lost its access to the credit market when it still was running deficit."
Inflation, which had been 25% in 2017, rose to 40% in 2018. Macri sought IMF assistance, but the crisis damaged his re-election prospects, and the Peronist opposition – now united – defeated him in 2019.
Credibility as the binding constraint
Galiani's central lesson is that in highly polarised, volatile economies, the survival of reforms depends not just on their technical merits but on the private sector's belief that they will endure. Investment and formalisation responses only materialise if firms and households discount the future tax path at a low rate, which requires confidence that the reform will outlast the government that enacted it.
The incoming Peronist administration swiftly dismantled several of the changes, including the pension adjustment formula. Yet Galiani notes that the experience was not without legacy: when Javier Milei took office, he returned to a pension formula similar to the one the Macri administration had passed, suggesting that repeated reform attempts can shift institutional understanding even when individual governments fall short.
References
Afonso, S, and S Galiani (2025), "Motives and constraints in the implementation of Argentina’s 2017 tax reform," Unpublished manuscript.