What's Wrong With Mexico?

[D'kian]

Mexico has a massive structural problem, largely as a result of the long rule by the Party of the Institutional Revolution (PRI).

The National Action Party (PAN) broke the PRI's monopoly in 2000 with the election to the presidency of Vicente Fox. In 2006 he was succeeded by Felipe Calderon also of the PAN. Fox heralded an era of change and he mostly failed to deliver. Calderon also promised to tackle the various structural problems. To his credit, he has done better in 8 months than Fox did in 6 years.

For starters Calderon mannaged to pass a law changing the pension system of new public sector workers. The law does nothing about existing workers, but at least it stops the pensions liability from growing indefinitely. In all fairness if he'd gone after existing pensions he would have lost all support from all opposition parties (including the PRI, which remains a sizable politicla force) for the rest of his term. meaning he would spend the next 5+ years doing as close to nothing as makes no difference. So it's understandable he accomplished something small, but nevertheless real.

Next he tried his hand at tax reform. I will tell you right now, as a Mexican taxpayer, we desperately need tax reform. The tax code we have now is too complex focuses on a relatively small number of taxpayers while giving the "underground economy" a pass. It imposes very high tax rates and encourages tax evasion and avoidance (avoindance defined as creating and exploiting loopholes, which further complicates the code). Meaning actual collections are low even though the rates are high.

So when Calderon's Treasury Secretary, Carstens, unveiled his proposal for tax reform and said the words "flat tax," I was hopeful.

Here's one problem. The flat tax is meant to do away with examptions and loopholes. Fine. But it's way too high. it starts at 16% of gross income minus a few deductions (less than in the previous scheme) and will climb over three years to 19%. Meanwhile the sales tax, or value added tax (VAT), remains at 15% with a host of exemptions and loopholes of its won. Taxes and fees on electricity and gasoline (both government monopolies, BTW) remain as well. Also still no the books, a lot of special taxes on a host of products such as corn syrup (don't ask), salmon and boots (really, don't ask).

The bigger problem is that the flat tax (called Entreprenurial Contribution at Flat Rate, or CETU in Spanish) does not replace the income tax, not exactly. Businesses would be required to calculate both the income tax and the CETU and pay whichever turns out to be higher. I swear I'm not making this up. So much for simplifying the tax paying process.

But wait, it gets worse. Various companies and people, mostly business owners and economists, have been complaining at the lack of deductions permited. So Carstens has said more deductions and some exemptions and loopholes will be allowed. So we're back were we strated, only with a more complex code, higher taxes and nothing is being done about evaders and avoiders.

But then the purpose of this bit of tax reform (both Calderon and Carstens promise further rounds) was not to simplify things, make the tax code fairer or even easier to comply with. Not at all. The purpose is to increase government revenue so that the state can meet its various populist programs. This is the line being sold us through ads by the tax colection arm of the Treasury department.

And that's still not all. You see, the PAN is supopsed to be the pro-business party of Mexico.