Inter-American Dialogue’s Latin America Advisor

How Will Mexico's Tax Reform Affect the Country's Economy?

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.

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