Comprehensive Study Notes on Public Finance and Financial Law

Core Concepts of Public Finance and State Activity

The study of public finance begins with the concept of economic activity, which is linked to the phenomenon of scarcity. Economics focuses on the allocation of resources that are insufficient to satisfy ever-expanding human needs. While personal finances involve individual wealth flows and corporate finances deal with complex business capital, public finance specifically addresses the economic activity performed by the State to fulfill its objectives. Public finance is defined as the state activity directed toward obtaining revenue and making expenditures to satisfy public needs. The State, as a human association, seeks the common good and the improvement of life in society through this financial phenomenon.

The State acts as a unique economic agent characterized by five fundamental principles: legitimacy and democratic representation (originating from the people), the principle of coercion (holding the monopoly on public force), a vocation of universality (applying to everyone and everything within a territory), indefectibility (unlimited permanence over time), and the heterogeneity and versatility of its ends. Unlike private actors who aim for utility or profit maximization, the State pursues economic stability, efficient resource allocation, appropriate income distribution, and economic development. The State acts as the sole active subject of financial activity, utilizing its fiscal powers and coercion, while the passive subjects are the taxpayers (individuals, companies, or provinces) legally obliged to fulfill the established provisions.

Financial activity consists of several constitutive phases: 1. Presupuestación (Planning), where future income and expenditures are quantified in a budget; 2. Obtaining Resources, where the methods and economic consequences of revenue generation are decided; 3. Application of Funds (Expenditure), the disbursement of resources for pre-fixed destinations; and 4. Control, the stage of verifying the legality and efficiency of financial execution.

Public Needs and the Evolution of Financial Thought

Public needs are the foundation of financial discussion, centering on whether needs are satisfied by individuals or through State intervention. Classic economics relied on the "invisible hand" for satisfaction, but market failures, such as the "free rider" dynamic (e.g., public park lighting), necessitate State intervention. Public needs are dynamic historical categories defined by the State at any given time. Absolute public needs, such as justice, security, and defense, must be covered by the State and are unavoidable. Relative public needs, such as health and education, are contingent and may be satisfied by either the State or private actors.

Financial thought has evolved through several historical schools:

• The Ancient Era: Characterized by minimal public financial activity, often sporadic for military campaigns or festivals.

• Modern Era: The rise of National States created a need for permanent financial activity and the differentiation between the State's assets and the ruler's assets.

• Mercantilism ($18^{th}$ Century): Emphasized wealth accumulation through precious metals and trade restrictions.

• Physiocracy: Advocated for individual liberty and a single tax on land production, following the principle of laissez faire - laissez passaire.

• The Cameralist School: Advantaged rational administration and State intervention, with authors like Von Justi ($1766$) viewing the State as responsible for citizen welfare.

• Classical Liberalism: Adam Smith argued for limited State spending (defense, justice, and infrastructure) and a tax system that is certain, proportional, and economical. David Ricardo emphasized the principles of benefit and ability to pay.

• Keynesianism: Following the crises of $1919$ and $1929$, Keynes posited that the State must actively intervene to correct market imbalances, moving away from strict annual budget balancing and viewing public debt as an ordinary tool.

• Constitutionalist Theory: Developed by Horacio Corti, this view argues that financial activity must make human rights and democratic institutions recognized in the Constitution effective.

Constitutional Principles of Public Finance

According to Corti's constitutionalist approach, financial activity is governed by primary and secondary principles. Primary principles include the Principle of Coherence (expenditures and resources are interdependent) and the Principle of Transcendence (financial activity is legally subordinate to the Constitution). Secondary principles include:

• Principle of Equality: Operates in two ways. Equality in revenue (recaudatoria) is not "equalitarianism" but requires treating taxpayers based on their ability to pay (capacidad contributiva). Equality in expenditure (erogatoria) mandates that those with the least effective exercise of rights should the most prioritized.

• Principle of Equity: In revenue, this limits the tax power to prevent confiscation (Art. $17$ CN). In expenditure, it complements equality by reducing gaps in the exercise of rights.

• Principle of Solidarity: Involves commitment to all inhabitants, including intergenerational solidarity (Art. $41$ CN) and financial solidarity in federal distribution (Art. $75$ inc. $2$ CN).

• Principle of Reasonability: Derived from Art. $28$ CN, ensuring principles and guarantees are not altered by the laws regulating them.

• Principle of Legality: The rule of "No tax without law" ensuring people's representatives dictate tax norms.

Fiscal policy, as studied by Musgrave, serves three primary functions: the Stabilizing Function (seeking full employment and price stability), the Redistribution Function (distributing wealth according to political justice), and the Allocation Function (dividing resources between public and private goods).

Characterization and Sources of Financial Law

Financial Law is the portion of the legal system regulating the organization of resources in the Public Treasury (Hacienda Pública). From a static perspective, the Treasury is the set of the State's rights and pecuniary obligations. From a dynamic perspective, it involves the procedures for managing income and expenditures. Financial Law is categorized into branches: Tax Law, Budget Law, Public Credit Law, Monetary Law (including the BCRA), and Patrimonial Law.

The primary sources of Financial Law include:

1. The National Constitution (CN): Articles $1$, $2$, $4$, $5$, $75$, $99$, and $100$. It establishes principles like non-confiscation, general taxes (Art. $16$), and freedom of territorial circulation (Arts. $9$ to $12$).

2. International Treaties: These include integration treaties like the Treaty of Asunción (Mercosur), which prohibits discriminatory taxes on member products.

3. Law 24.156 (LAF): Regulates financial administration systems (Budget, Accounting, Treasury, Credit) and control (SIGEN and AGN). It applies to the National Public Sector, including decentralized organisms, state companies, and trust funds (Art. $8$ LAF).

4. Law 12.510: The provincial equivalent in Santa Fe, aligning with federal guidelines.

5. Intrafederal Law: Such as the Federal Coparticipation Law and the Multilateral Convention (allocating the Gross Income Tax base among jurisdictions).

6. Case Law: Decisions by the CSJN (Supreme Court) carry significant weight, particularly regarding the unconstitutionality of tax-related DNUs (e.g., Videoclub Dreams).

The Public Budget (Presupuesto)

As defined by Art. $75$ inc. $8$ of the CN and Art. $12$ of the LAF, the budget is a financial, administrative, and economic instrument of planning. It contains an estimation of resources and a maximum authorization for spending for one year. It serves three functions: rationalizing resources, enabling legislative control over the executive, and linking State actions to the national economy.

Key Principles of the Budget System:

• Reserve of Law (Competence): Only the legislature can authorize expenses and taxes.

• Universalism: All predicted income and expenses must be shown in their gross amounts without compensation.

• Specialty: Expenses are limited by type, amount, and time.

• Exclusivity: The budget law should only contain budgetary matters (though the Zofracor ruling allows exceptions).

• Annual Periodicity: The financial year in Argentina runs from January $1$ to December $31$ (Art. $10$ LAF).

• No-Affectation of Revenue: Specific revenues should not be earmarked for specific expenses (Art. $23$ LAF), though exceptions exist.

The budget cycle involves elaboration (led by the ONP and presented by the Chief of Cabinet before September $15$), legislative treatment, execution (managed through administrative distribution, commitment, accrual, and payment), and control.

Stages of Budget Execution

1. Administrative Distribution: The Chief of Cabinet breaks down the budget into detailed categories.

2. Commitment (Compromiso): An internal act that reserves funds for a specific purpose.

3. Accrual (Devengo): The decisive execution stage where a legal obligation to pay arises (e.g., receipt of goods/services).

4. Payment (Pago): The effective exit of funds from the Treasury, usually through a single box system (caja única).

The Treasury system, led by the Tesorería General de la Nación (TGN), manages the flow of funds and can issue Treasury bills for seasonal deficits. The Accounting system, led by the Contaduría General de la Nación (CGN), records all transactions based on principles like equity and management continuity.

Federalism and the Power to Tax

Financial power is the State's sovereign capacity to manage revenue and spending. It includes the power to tax (poder tributario). In Argentina's federal system, this power is distributed between the Nation and the Provinces:

• Nation (Exclusive): Custom duties (import/export).

• Nation (Concurrent with Provinces): Indirect taxes (e.g., consumption taxes).

• Nation (Temporary/Exceptional): Direct taxes (e.g., gain tax), provided they are justified by defense or general welfare.

• Provinces: Retain all powers not delegated to the Nation, including permanent direct and indirect taxes.

• Municipalities: Their powers are derived from provincial laws and constitutions. Key case: Rivademar established the autonomy of municipalities.

Federal Coparticipation (Law 23.548) is the system for distributing tax revenue. Primary Distribution occurs between the Nation ($42.34\%$) and the Provinces ($54.66\%$). Secondary Distribution is the specific percentage assigned to each province based on objective criteria.

Public Expenditure (Gasto Público)

Public expenditure refers to the monetary disbursements by the State to satisfy public needs and make rights effective. Elements include monetary erogation by the State and prior budget authorization. Classic thought considered it unproductive, whereas modern thought uses it as a tool for income redistribution and economic growth.

Causes for the increase in public spending include:

• Apparent Causes: Currency devaluation (inflation) or changes in accounting criteria.

• Mixed Causes: Growth in population or territory expansion.

• Real Causes: Increased national income, new state functions (horizontal expansion), technological innovations, and the costs of defense/war.

Classification and Effects of Expenditure

Expenditures are classified administratively (by organ), economically (current vs. capital/investment), and functionally (social, economic, general). The "Multiplier Effect" is the ratio by which an increase in public spending increases national income, depending on the marginal propensity to consume. The "Accelerator Effect" describes how public spending leading to higher consumption prompts an increase in the demand for capital goods.

Public Resources and the Central Bank (BCRA)

Resources are classified as Originating (from State assets, like land, forests, and mines) or Derived (coactive measures like taxes). State Enterprises are categorized as autarchic entities (e.g., AFIP), companies of the state, mixed economies, and state-owned corporations.

The Banco Central de la República Argentina (BCRA) is an autarchic entity. According to its Charter (Law 26.739), its objectives are monetary stability, financial stability, employment, and economic development with equity. Functions include monetary issuance, serving as the State's financial agent, and administering reserves. Prohibitions (Art. $19$) include granting loans to provinces/municipalities or participating in commercial industries. It can provide "temporary advances" (adelantos transitorios) to the National Government up to $12\%$ of the monetary base plus $10\%$ of cash revenue from the last year.

Tax System and Public Credit

Taxes are divided into:

1. Impuestos (Taxes): No direct State service provided to the individual (e.g., IVA, Gains).

2. Tasas (Fees): Paid for a concrete, individualized service (Compañía Química).

3. Contribuciones Especiales: Paid when a public work increases the value of a property.

4. Parafiscal Resources: Funds like social security contributions administered by decentralized bodies.

Public Credit is the State's ability to borrow based on trust. Debt can be internal or external, and short (under $1$ year), medium ($1-5$ years), or long term (over $5$ years). The National Congress has the power to "arrange" the debt (Art. $75$ inc. $4$ & $7$). Reengineering the debt includes Conversion (changing terms/rates) and Consolidation (postponing maturity). Repudiation is the deliberate refusal to pay, while Default is the socio-economic inability to meet payments.

Control Systems and Key Case Law

Control is the final stage of the financial circuit.

• Internal Control: Performed by the Sindicatura General de la Nación (SIGEN), reporting to the President. It uses units of internal audit (UAI) in each organism.

• External Control: Performed by the Auditoría General de la Nación (AGN), which depends on Congress. Its president is proposed by the main opposition party (Art. $85$ CN).

• Account Investment (Cuenta de Inversión): The annual report prepared by the CGN and submitted to Congress by June $30$ to verify how the budget was executed.

Significant Court Cases:

• Rivademar: Affirmed municipalities are autonomous organs, not mere administrative delegations.

• Videoclub Dreams: Confirmed DNUs cannot create taxes; the principle of legality is absolute.

• Santa Fe & Others: Declared the unilateral $15\%$ retention of coparticipable funds for social security as unconstitutional.

• Quisberth Castro: Ruled that budgetary scarcity cannot justify the failure to provide housing to a mother and child in an extreme situation of vulnerability/disability.

• Zofracor: Held that budget law restrictions are "self-limitations" of Congress and can be modified by subsequent laws.

• Laboratorios Raffo: Established that a municipality cannot charge a tax disguised as a fee if it does not provide a concrete service at the taxpayer's location.