Mexico’s new social reforms hinge on unclogging a stubborn tax pipeline

CORNELL UNIVERSITY MEDIA RELATIONS OFFICE

Sept. 11, 2013 

Mexico’s new social reforms hinge on unclogging a stubborn tax pipeline

Gustavo Flores-Macias is a professor of government at Cornell University, former director of public affairs in Mexico’s Consumer Protection Agency, and author of “After Neoliberalism? The Left and Economic Reforms in Latin America.” He comments on Mexico’s new social reforms.

Flores-Macias says:

“On Monday, Mexico’s President Enrique Peña Nieto revealed the details of a much-anticipated and ambitious fiscal reform. Some of the key aspects of the initiative include a single rate for the value-added tax across the country, an increase in the top marginal tax rate (from 30 to 32 percent) for annual income over MX $500,000 (about US $38,500), a new capital gains tax of 10 percent, and changes in the way business conglomerates deduct losses across units. Although these changes are aimed at increasing tax revenue, the government is calling the initiative a ‘social reform’ because it also introduces pensions and unemployment insurance plans at the national level.

“Given the disappointing economic growth in the first year of the Peña Nieto government, as well as the very low levels of tax collection in Mexico compared to other countries at similar levels of development, the stakes are high for the reform. The government appears to have enough support in Congress with the votes of its own PRI and the right-of-center PAN, so the reform has good chances of approval without major surgery in the legislature.

“Nonetheless, there are important aspects of the reform that will have to be clarified. In particular, the pensions and unemployment insurance programs will translate into significant additional expenditures, and it is unclear whether the new tax revenue will cover them. The government’s plan implies a budget deficit of 1.5 percent of GDP, which rises to 3.5 percent once investments in Pemex, the national oil company, are considered. Therefore, the feasibility of the ambitious social reforms in the proposal will be contingent on whether the government is indeed able to increase tax revenue as a share of GDP – which the tax reforms of the last several years have failed to do.”

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