Tax breaks for attending “civic values” courses, tax-free sales of second-hand furniture, special treatment for call centres and an informal economy employing six out of 10 workers are all in the line of fire as Mexico prepares a long-awaited tax overhaul.
An analysis of budget data shows Mexico’s extensive network of tax breaks and stimulus programmes generate costs equal to about half the taxes actually collected.
Mexico has the lowest tax revenue in the 34-nation Organisation for Economic Co-operation and Development, crimping its ability to spend on health, infrastructure and social programmes vital to boost living standards and growth in what is Latin America’s second-largest economy.
Finance Minister Luis Videgaray has given few details of the overhaul, due to be presented in the autumn session of Congress, but has promised it will be “large,” reviewing both direct and indirect taxes and making those who earn more, pay more.
Currently, the world’s richest man, Carlos Slim, is in the same tax bracket as a worker earning $2,700 a month, paying 30% income tax – low compared to top rates of 39.6% in the US, 45% in Germany and 50% in Japan.
No data is available on revenue by tax bracket, but most of the poor live and work in a shadow economy that accounts for one-third of gross domestic product (GDP) and pay little tax. That leaves a high burden on middle-income earners.
The narrow tax base, along with a complicated tax code and rampant evasion, capped gross tax revenues at just 9.7% of GDP in 2012. The reform will aim to boost that and ease the country’s reliance on oil revenues, which account for nearly 40% of government income and make it vulnerable to market swings.
OECD head Angel Gurria, a former Mexican finance minister, still shudders at the memory of the Asian financial crisis in 1997 and 1998, when benchmark oil prices fell as low as $8 per barrel, half the level the government had budgeted for.
“One day when I was finance minister I came into the office at 9am and the budget deficit was at 0.5 (percent of GDP) and by the time the day was over it was at 3%,” he said in January.
Although Mexico has a balanced budget and optimism about the government’s reform agenda is drawing a surge in foreign investment, ratings agencies say the skimpy tax base and oil dependence have been hurdles to a sought-after upgrade, especially as oil output has dropped by a quarter since 2004.
Standard & Poor’s changed its outlook on Mexico’s BBB-rating to positive in March, suggesting an upgrade is possible within 18 months, but S&P credit analyst Joydeep Mukherji said the scope of the fiscal reform would be key.
“If it’s basically a relatively small impact and kind of gets washed out among other things, it won’t have a big impact and we may not upgrade,” he said. “You can’t rely forever on that much money from the oil sector and such high oil prices.”
Mexico’s net tax income, taking the negative impact of fuel subsidies into account, was worth just 8.5% of GDP last year.
Total government revenue, including oil, averaged 18% of GDP in the last decade, compared to 26% in the US, 32% in Brazil and more than 40% in some European countries, OECD data show.
Experts estimate Mexico must boost its tax intake by 6-8 percentage points of GDP, or about $100bn a year to reduce its reliance on oil revenues and fund increased government spending, although the reform could start out netting half that amount and be ramped up progressively over coming years.
Measures to bridge the gap could include increased efforts to tackle tax evasion, worth 2.57% of GDP in 2007 according to the Monterrey Institute of Advanced Technological Studies.
Other options are raising top personal tax rates for the rich; making state governments levy more tax; imposing taxes on capital gains, inheritances and property transfers; and scrapping an entrenched zero rate of value-added tax (VAT) on basic food and medicine.
This last exemption is the biggest single contributor to tax breaks worth 4.8% of GDP in 2012, equivalent to about half of tax revenues.
Source: Caye Global News, Reuters/Mexico City
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