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Mexico unveils populist plans for tax reform

September 10, 2013

The government has scrapped controversial plans to apply valued-added taxes to food and medicine, President Enrique Peña Nieto revealed on Sunday, as he outlined his proposals for an overhaul of Mexico’s infertile tax system.

“Those who earn more will pay more and the biggest benefits will go to the most needy,” the president said of his ambitious, left-leaning proposals, which include a tax hike for the highest earners, a ten-percent levy on stock-market gains and the elimination of some two-thirds of tax breaks and exemptions.

Peña Nieto branded his draft for tax reform as “good news for Mexican families,” because the revenue it generates would be used to pay for universal pensions for those aged over 65, plus a new unemployment insurance scheme and greater funding for schools. Social security will no longer be a benefit of those in the formal economy; it will now be a universal human right, the president said.

The Institutional Revolutionary Party (PRI) government had planned to introduce value-added tax on food and medicine, but this polemic proposal was eventually scrapped, with Peña Nieto admitting it would have hurt the most vulnerable sectors of society. Instead, he opted for more populist means of raising revenue, such as scrapping loopholes and exemptions that have long favored the wealthiest Mexicans, and raising income taxes from 30 to 32 percent for those in the highest tax band, who earn over 500,000 pesos a year.

Other proposals include Mexico’s first ever tax on carbon emissions and even a levy on sugary sodas, in a bid to combat obesity. The government also plans to streamline income tax regulation, making it a more simple and efficient process by reducing the number of articles from 295 to 186.

One of the least popular proposals will be that of gradually phasing out gasoline subsidies, with prices set to rise in line with inflation from 2014, while daytrippers from the United States could soon be faced with higher prices, as the PRI intends to bring an end to the reduced sales tax along the border area.

The government hopes these reforms will see revenue from taxes rise by nearly three percent of gross domestic product (GDP) by 2018. The federal budget is currently limited by Mexico’s meager tax revenue, which was equivalent to just 9.7 percent of GDP in 2012, the lowest such return of all 34 members of the Organization for Economic Cooperation and Development (OECD).

Another of the government’s aims is to ease Mexico’s reliance on state-owned oil monopoly Pemex, which funds around one-third of all state expenditure. Putting an end to subsidized fuel would also enable Pemex to invest more of its revenue in exploiting Mexico’s oil and gas reserves and ending the decade-long slump in output.

By abandoning plans to tax food and medicine, and vowing to use tax revenue in social programs, the government has not only nullified the argument of Andres Manuel Lopez Obrador that the reforms will hit the poor hardest; it has also placated the leftist Party of the Democratic Revolution (PRD) and kept it from withdrawing from the tri-partisan Pact for Mexico. Although the centrist PRI is not reliant on PRD votes to pass its energy reforms in Congress, where it can count on the support of the right-wing PAN, the government now finds itself engaged in a political balancing act and may not be able to pass the tax reforms without keeping the PRD onside, as in this case the PAN is strongly opposed to the levy on income tax for high earners.

PAN politicians have called it an attack on the middle class, but considering how few Mexicans earn over 500,000 pesos a year, the move to raise taxes in the upper income bracket should prove a broadly popular one, affecting the small upper echelons of society more than the broad middle class. However, even if passed by Congress, the government’s plans may prove difficult to enforce, as the nation’s elite have long excelled in finding means of evading taxes.

Moreover, if the government is truly committed to helping those at the bottom and alleviating Mexico’s poverty rate of almost 50 percent, then it must take great care to avoid the wasteful (and often corrupt) expenditure of tax revenue that has undermined past attempts to bring about meaningful social progress.

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