On Sunday, Mexican President Enrique Peña Nieto unveiled a fiscal reform bill that is an important corollary of his energy reform proposal. The legislation’s main goal is to increase the federal government’s tax intake in the face of diminished oil revenues due to the reforms that will let Petróleos de México (Pemex) keep more of its money for investments.
Approximately one third of the government’s revenues comes from oil. The fact that oil production is declining significantly (it dropped 25 percent in the last decade), adds urgency to generating new sources of tax revenue or reducing spending. Mexico’s fiscal deficit last year was 2.6 percent of its GDP, but without oil revenues it would have been close to 8 percent instead.
The good: The bill will simplify Mexico’s complex tax system. In the World Bank’s Doing Business report, Mexico ranks 107th among 185 economies on its ease of paying taxes. It takes an average Mexican businessman 337 hours every year to calculate and pay his taxes, whereas his peers in the mostly developed nations of the OECD have to spend an average 176 hours every year doing their taxes. A complex tax system constitutes a burden on the economy and can also be extremely inefficient since it encourages people to elude and evade taxes (particularly in developing countries with weak institutions). Thus, you can have a country such as Mexico with high tax rates and yet low tax revenues. This is a problem because it can lead to a slippery slope where politicians try to extract more revenue via higher taxes from a dwindling pool of taxpayers.
The current top rate on the personal income tax is 30 percent. The corporate tax rate is also 30 percent. The Value Added Tax (VAT) is 16 percent. And yet Mexico’s tax intake was only 9.7 percent of its GDP in 2012. This is not to say that Mexico should have a higher tax burden, but to point out that there is something wrong with a tax system if it has fairly high tax rates that don’t generate much revenue.