Analysis of Mexico's New Tax System
Analysis of Mexico's New Tax System
Introduction:
Because of all the fiscal leakage from the huge informal economy -not to mention an upper class with clever accountants- tax evasion ranks among Mexico's favourite pastimes.
Mexico is Latin America's second-largest economy, but currently it has one of the region's lowest tax-collection rates: Mexico collects taxes worth only 11.2 percent of its gross domestic product. Countries such as Brazil and Chile collect more than 15 percent, and the United States takes even more. Over the last seven years, oil has accounted for between a fifth and a third of public income. Last year, the Finance Ministry had to cut spending several times to make up for falling oil prices.
Mexico’s economics analysts reckoned that, effectively collected, taxes could, in a healthy way, boost government income and ease dependence on oil exports.
President Vicente Fox sent to the congress a new tax law “initiative” that proposed to raise nearly 10 percent of total revenue, by means of applying a Value Added Tax (or IVA, according to its Spanish acronym) rate of 15% to the sales of food, medicine and press publications; all of which were currently tax-exempted.
The reasoning of President Fox’s government departs from the position that the fiscal reform will bring, as a consequence, a firmer control in the short term over inflation, in spite of the increase of the IVA; diminutions of credit interest rates, and will reactivate the country’s economy to guarantee a maintained average growth of an annual 7%, with a consequent constant increase in employment and job creation levels, guaranteeing to increase the standard of living of the population.
That sparked outrage among millions of average Mexicans, knocking down Fox's approval rating to about 50 percent from a high of 80 percent, according to independent surveys. Legislators said that the Fox plan would have punished the country's poor, who make up about 40 million of the country's total population of 100 million.
The New Taxes and some of the Affected Stakeholders…
Instead of looking for alternate, more conciliatory, measures to collect the needed resources; lawmakers approved, in a lightning, last minute session, a new tax code that is expected to add about 60 billion pesos to the finance ministry's coffers, half of what the government initially sought to collect in additional revenue when it submitted seven initiatives to revamp Mexico's tax laws in April.
The new tax code pretends to increase the government’s budget...