Mexico would impose new taxes, close corporate loopholes and crack down on scofflaws in the underground economy under a plan to boost revenue unveiled Wednesday by Mexican Finance Secretary Agustin Carstens.
The proposals submitted to congress mark the beginning of what promises to be fierce debate this year over how to boost tax receipts in Mexico. The nation has one of the least effective tax-collection systems in the Western Hemisphere.
Experts across the political spectrum agree that Mexico needs significantly higher receipts to improve its competitiveness and fight poverty. The tough part is figuring out who should pay.
The issue has taken on new urgency since oil production has begun to slide at the state oil company, Pemex, by far the nation’s biggest taxpayer. Last year, oil revenue funded nearly 40% of Mexico’s federal spending. But the nation has a little more than a decade’s worth of proven reserves remaining.
“The treasury needs to reduce its dependence on petroleum,” Carstens said. “The difficult challenge is to expand the tax base.”
At present, Mexico’s non-oil tax revenue is equivalent to about 11% of GDP. Carstens said that figure would have to nearly double over the next 20 years.
The centerpiece of the administration’s plan is a business tax of 19% that would function somewhat like the alternative minimum tax in the United States. The idea is to ensure that companies pay at least a base level of tax on their economic activity. It would eliminate a host of deductions and exemptions that many businesses have employed to shrink tax liability.
“We have a system that allows tax evasion in most cases if you have good accountants or good lawyers,” said Mexican President Felipe Calderon, speaking at an event in the state of Tlaxcala. “In the fiscal system that we’re proposing, and that the country needs, there must not be any privileges.”
But some major loopholes enjoyed by the nation’s biggest businesses appear to remain intact, said Mexico City economist Rogelio Ramirez de la O, who fears that most of the burden will fall on small firms.
“This could double or triple the effective tax rate of small businesses,” he said. “They are the ones providing most of the jobs.”
Calderon’s plan also attempts to reduce tax evasion by slapping a 2% tax on cash bank deposits that exceed 20,000 pesos (about $1,844) in any month. The tax aims to snare more revenue from entrepreneurs who deal mostly in cash in the underground economy. The tax would be reimbursed to those filing income taxes.
Tax evasion is rampant in Mexico, where as much as half of potential revenue goes uncollected, according to estimates.
Other proposals include a 20% tax on revenue from lotteries and gaming, and a 50% levy on aerosol paints and sprays, which appears to be a de facto “graffiti tax.” The plan also proposes giving states increased authority to collect taxes, and it calls for increased efficiency and transparency in public spending.
One area the administration’s plan didn’t touch is Mexico’s value-added tax, a 15% levy that functions like a sales tax for consumers. Some experts had advised lowering the tax but expanding it to food and medicine.
Such a strategy would have raised billions quickly. But consumption taxes are more burdensome for low-income households than rich ones.
Mexicans have already been hit hard by rising prices for milk, tortillas and eggs. Populist Andres Manuel Lopez Obrador, who lost the presidency to Calderon last year by a razor-thin margin, had threatened massive street protests if the administration attempted to tax staples.
Lawmakers are unlikely to take up the measure until the new congressional session begins in September.
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Mexico ranks among the world’s big economies, but it’s a decided laggard when it comes to tax collection.
Taxes as a percentage of gross domestic product*
*--* France 43.7% Italy 42.2 Britain 36.1 Spain 35.1 Germany 34.6 Canada 33.0 Turkey 31.1 United States 25.4 Japan 25.3** South Korea 24.6 Mexico 18.5*
All taxes, all levels of government in 2004
**For 2003; 2004 not available
Source: Organization for Economic Cooperation and Development