Mexico Targets Untaxed Earnings : It Plans to Put More Firms on the Books, Boost Revenues

Esperanza Reyes works every day at her downtown stand selling cigarettes, chewing gum and peanuts to workers from nearby office buildings.

She said she has been working the same spot for five years now but holds no official permit, and the only government fees she pays are weekly under-the-table “charges” to city officials who allow her to stay in business.

Reyes and tens of thousands of Mexicans like her are part of the country’s growing underground economy, an unregistered, untaxed sector that economists said produced last year an equivalent of about one-third the country’s gross domestic product.

While the vendors, fire-eaters and guitar players working street corners throughout the country are the most visible members of the underground economy, analysts said the sector includes everything from drug traffickers to factories and is fueled by high unemployment rates and chronic tax evasion.

In an effort to crack down on the phenomenon and boost sagging revenues, the government is undertaking what it has called an “aggressive” campaign to put more of these illicit earnings on the books.

“The problem with the underground economy is that it’s a sector that does not pay taxes and as a result is a loss for the government,” one private sector analyst said.

In a recent report, the respected Center for Economic Studies of the Private Sector put the underground economy at 25.7% of the gross domestic product in 1985 and estimated that in 1986 the figure was closer to 30%. Commerce Undersecretary Mauricio de Maria y Campos said last month that among small-sized factories, about 60,000--almost half of the total operating in Mexico--operate clandestinely.

Unequal Burden

Private sector groups have complained that with the growth of the underground economy, the government has compensated for its shrinking tax base by placing a greater tax burden on fewer above-board individuals and companies, which in turn has led to greater evasion.

“The problem in Mexico is that there is one sector on which the bulk of the tax burden falls, while others go practically untaxed,” said one private sector analyst who asked not to be named.

Mexico signed an accord with the International Monetary Fund last July for a standby financing agreement as the country struggles with a total debt of $98 billion. The government vowed to enact revenue-raising tax reforms in an effort to reduce its budget deficit, which last year ran at 16.8% of the gross domestic product.

Last December, Mexico’s Congress passed a new tax code that cuts the top rate for companies and individuals from 42% to 35% while boosting deductions for new investment and gradually phasing out writeoffs for interest payments on domestic loans.

A spokesman for the Finance Ministry said the government is taking additional measures to encourage more firms and individuals to go above board, including simplifying tax forms and hiring a battery of auditors.

“We’ve undertaken a very strong campaign against tax evasion,” the spokesman said.

Another incentive for putting more underground firms on the books, analysts said, is to encourage growth in a sector of the economy that traditionally has avoided expansion to avoid attracting attention from government tax collectors.

“The underground economy is a sector that cannot grow and cannot become very prosperous because to grow would imply a greater possibility of their being confiscated,” the private sector analyst said.

Government and private analysts admit, however, that as long as unemployment amd underemployment--now estimated as high as 40%--remain high, the problem of the underground economy will persist.

They said that despite its adverse effects on government income, the sector at the very least serves as a safety valve for those unable to find more legitimate employment.

“These small industries are very valuable for the country even though they work clandestinely, because they are involved in productive activities and generate employment,” said Commerce Undersecretary De Maria y Campos.