Strengthening democratic governance through more equitable taxes: enhancing the property assessment system in the City of Buenos Aires, Argentina

Abstract

According to the World Bank, Democratic Governance can be defined as the traditions and institutions by which authority in a country is exercised for the common good. Democratic Governance includes, as two of its key aspects, (i) the capacity of the government to effectively manage its resources and implement sound policies; and (ii) the respect of citizens and the state for the institutions that govern social and economic interactions among them. While the capacity of the government to effectively manage its resources is often analyzed from the expenditure side, there is also an important revenue side to this key aspect. A tax system, how a government collects resources from its citizens, should be perceived as fair by the citizens if the government is exercising the authority for the common good. A tax system perceived as unfair clearly limits democratic governance, as it reduces the citizen's trust in institutions and can negatively affect the capacity of the government to manage its resources by reducing tax compliance.

In addition, when taxation systems are highly regressive they impose a hard burden on the poor and limit the capacity of the State to count with the necessary tax-base to provide the necessary services needed for reducing poverty and inequality and promoting economic growth. This also helps create the perception that some groups in society have unequal access to power and excessive influence over the decision making process, which in turn, undermines democratic governance.

Property Taxes in Buenos Aires represent a concern both from a fiscal perspective and from an equity perspective. From a fiscal perspective, the weight of property taxes in Buenos Aires has been decreasing steadily over the last six years due to the existent property assessment process. Apart from reducing potential government expenditures, the significant reduction in property tax revenues adds to the regressivity of the overall tax structure: as property ownership tends to be heavily concentrated among the wealthy in developing countries and landlords are often not reached by the income tax system, property taxes are often seen as a vehicle that contributes to vertical equity. From an equity perspective, the distortions generated by the current system have created serious inequities and represent a very important concern for the citizens of Buenos Aires and their local authorities.

This paper analyzes the current methodology used to calculate the property tax in the City of Buenos Aires and recommends policy options based on international experience for enhancing the transparency of the process and making property taxes more equitable. Higher levels of equity and transparency in property taxes will enhance the perception of fairness of the tax system and will increase the citizen's trust in the government, strengthening local democratic governance in the capital district of Argentina.