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The tax reform final bill passed by Congress will not modify the structure of the fiscal system significantly, but also will not generate the sufficient amount of resources for the country's needs, experts warn. (Photo: Camara de Diputados)
Wednesday, November 20, 2013
Perspectives

Mexico Tax: Insufficient Reform


How will Mexico's tax reform affect the country's economy?

 

BY LATIN AMERICA ADVISOR
Inter-American Dialogue 

 

Mexican lawmakers on Oct. 31 passed a fiscal reform plan that is widely perceived as a watered-down version of earlier proposals. While the plan increases taxes for the wealthy and includes higher taxes on stock market gains and purchases of junk food, it is not expected to significantly increase the government's tax revenues, critics say. What effects will the reform have on Mexico's economy and government revenues? What do the results of this legislative battle reveal about President Enrique Peña Nieto's clout and his ambitions to pass other reforms?

 

Andrés Rozental, member of the Advisor board, president of Rozental & Asociados in Mexico City and senior fellow at the Brookings Institution: The government's fiscal reform package was not only watered-down from a previous draft that included adding VAT to food and medicine among other changes, it is also a poorly drafted law that will, in many cases, be difficult to implement. Representing barely a 1 percent additional share of fiscal revenue, it also will be insufficient to begin the process of weaning the government off Pemex's revenues for budgetary expenses. Experts agree that in order for that process to be genuinely effective, somewhere between 3-4 percent of fiscal revenue as a percentage of GDP needs to be added yearly to the government's income, in addition to a sharp reduction in spending. The main fault with the approved reform is that it does almost nothing to widen the taxpayer base, aiming its provisions of increased personal income and some new taxes on a captive middle class that already pays taxes, as well as on corporations that will have additional fiscal burdens to deal with--and eventually pass on to consumers. Although the private sector lobbied hard to change some of the government's proposed provisions, by and large Congress approved the package without major changes, except to keep VAT exemptions on private school tuition and home sales, among others, and approve new 'anti-obesity' surcharges on junk food and soft drinks. A new mining tax was also approved that will act as a disincentive to mining companies expanding their operations in Mexico, and a tightening of the rules on VAT reimbursement for maquiladoras is also likely to negatively affect those investments. All in all, it is an ill-advised 'reform' package that will probably have to be revised in the course of 2014.

 

Alfredo Coutiño, director for Latin America at Moody's Analytics: Based on the final content of the approved fiscal reform, one could say that the initial proposal did not arrive at the right moment in terms of economic conditions. Originally, the government expected economic growth of 3.5 percent for 2013, but it has been revised down to around 1 percent by markets and even by the central bank. Increasing taxes during unfavorable economic times will always incur resistance from society, particularly when people are uncertain about their jobs. Also, more taxes tend to affect income and consequently consumption and investment decisions in the short run. All this partly explains why the original proposal was diluted. The other reason is that Congress realized that most of the burden was charged to taxpayers with no significant effort in terms of fiscal austerity, thus leading to some budget cuts. The original proposal sought to increase tax revenues by about 3 percent of GDP by 2018, but the final bill is estimated to generate extra revenues of as much as 2.5 percent. The Congress once again had to use the price of oil as a compensation mechanism for the reduction in tax revenues. It is perceived that the final bill will not modify the structure of the fiscal system significantly, but also will not generate the sufficient amount of resources for the country's needs. The resulting deficit will be financed by public debt from 2013 to 2016. So far, the direct effects on the economy are uncertain since the reform will not generate enough revenues to invest heavily or even save for the future. However, it will have an impact on expectations and future decisions since it represents an effort in the right direction. In this sense, political forces seem to be willing to support structural changes, which will generate momentum for further reforms.

 

George W. Grayson, Class of 1938 Professor of Government Emeritus at the College of William & Mary in Williamsburg, Va.: The 2014 fiscal reform is a Potemkin Village jerry-rigged by the PRI and the PRD at the expense of the PAN and its middle-class constituents. The façade masks a cynical alliance between Peña Nieto's team and the left. Their goal is to strengthen the president's party for the 2015 legislative contests, which priístas hope will ensure a second straight lease on Los Pinos three years later. Budget guru Luis Videgaray propitiated the opportunistic PRD, whose leaders have PRI DNA coursing through their veins, by scrapping the extension of the value-added tax to food and medicine, presenting a 'light' energy plan bereft of risk contracts so crucial to attracting robust investment in the energy section, generously funding the fraud-prone Crusade against Hunger, and approving a bulging honey pot of 7.5 billion pesos ($579.7 million) in resources for social infrastructure in Mexico City, the PRD's bastion. Rather than reining in the 20 PRI governors and their rival peers who bask in impunity in their fiefdoms, the Congress jettisoned initiatives that could impel a crackdown on outsized deficits, greater accountability of expenditures, limits on self-promoting public relations outlays, a national Federal Electoral Institute and muscular transparency laws. Meanwhile, the budget includes 1.2 billion pesos ($92.8 million) for largess that serves to grease state-level Tammany Hall-style machines for upcoming campaigns. Once Peña Nieto has completed the lube job, he will drop the PRD like a bad habit.


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

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