How Important Are Mexico’s Proposed Tax System Reforms?

Andrés Rozental
Andrés Rozental Former Brookings Expert

September 18, 2013

Question: Mexican President Enrique Peña Nieto on Sept. 8 unveiled his plan for an overhaul of the country’s tax system. The reforms would impose new taxes on the country’s top earners as well as on capital gains. How important are tax system reforms for Mexico’s economy? Do the specific parts of the reform address the right areas? How valid are the concerns of critics who oppose the reform’s proposals to tax private education and end mortgage rebates?

Answer: President Peña Nieto’s proposed tax reform doesn’t go far enough to change the fact that a large percentage of Mexicans pay little or no income tax, find ways of avoiding the VAT by underinvoicing or paying cash, are not liable for inheritance or wealth taxes and in general put the country at the bottom of the OECD list of fiscal revenue as a percentage of GDP. Rumors floated in the weeks and months before the September deadline that the proposal included a general rise in the VAT rate, removing the VAT-free status of some foods and medicines, doing away with a majority of the loopholes that currently allow individuals and companies to pay little or no tax, etc. In the end, the government opted for a ‘light’ reform that most analysts agree will add much less to fiscal revenue than what is needed. As on previous occasions, the fiscal reform such as it is targets captive middle- and upperclass taxpayers who will have to add to their fiscal burden, while doing little to enlarge the tax base to the millions who pay little or nothing. It’s clear that the president was frightened by the continuing marches and social disruptions by opponents to the education and energy reform packages presented earlier to Congress, and that he decided to avoid provoking further street protests by those who would be most affected by a real fiscal reform. Hopefully, in the coming years the government will build on this partial reform and give Mexico the fiscal structure its economy so badly needs in order to replace the national oil company, Pemex, as the funder of close to 40 percent of public expenditure.

Read more in the September 18, 2013 issue of the Inter-American Dialogue’s Latin America Advisor »