Tax Reform in Mexico – Bad Tasting Medicine

Escrito el 25 Octubre 2006 por Rafael Pampillón en América Latina

Sent by Mark Madison (International mba, Instituto de Empresa): When Margaret Thatcher implemented painful economic reforms in the UK in 1980, she said that at the start of a treatment, sometimes the effect of the medicine is worse than the disease. But things get better eventually. The same is true for Mexico today. Nobody likes to pay taxes, but if Mexicans want their economy to achieve sustainable growth, they need to reform their tax system: tax reform is a bad-tasting pill they need to swallow.

How do they do it? The OECD believes Mexico can achieve 6% economic growth while maintaining price stability by doing two things: developing a bigger and more stable tax base. http://www.oecd.org/dataoecd/3/63/22425199.pdf This could be done in Mexico by increasing the number of people with lower incomes paying taxes and punishing those who avoid paying taxes.

The InterAmerican Center of Tax (CIAT) agrees and notes that Mexico’s current system is overly complicated and the tax base is neither broad enough nor stable. http://www.ciat.org/es/bdat/docures/desc/dmx_sistema_tributario_mexico.pdf

Tax reform as a means to fuel development and growth is not a new theory. Both the IMF and the World Bank have been pushing countries to improve their tax systems as a way to create sustainable economic growth. In Colombia, for example, where only 1.2 million of its 43 million citizens pay taxes, the IMF and the Colombian tax authority (http://www.dian.gov.co/) are working together to expand the tax base. Brazil too has recently increased its growth by reducing the tax on foreign investment into public securities. http://www.imf.org/external/np/sec/pn/2006/pn0669.htm. Successful examples can also be found outside of Latin America (this week’s Economist talks about how tax reform in Russia in 2001 increased tax revenues by 26% in the first year. All of this leads me to believe that tax reform should be on the agenda of the Summit.

Assuming Mexico successfully increases its tax revenues, I agree with the OECD that the primary target of increased spending should be on education, infrastructure, health and targeted poverty relief. But how would the Mexican government actually spend the new funds? Unfortunately, corruption remains a big problem in Mexico (ranked #65/158 in the corruption index published by www.transparency.org). Without greater transparency, much of the new funds will disappear.

Nonetheless, newly-elected President Calderón should push for reform. A few weeks ago the IMF Executive Board met with Mexico and again underscored that for the economy to continue growing, Mexico need to increase tax revenues and to implement tax reforms. http://www.imf.org/external/np/sec/pn/2006/pn06110.htm

Will Calderón and the opposition led by Andrés Manuel López Obrador be able to work together on this important issue?


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