Posted by: Maher | October 1, 2007

Fiscal Reform in Mexico: Improving Competitiveness

The Mexican lower house approved president Calderon’s fiscal reform. Now, the proposal must be approved by the Senate for the bill to be added in the 2008 budget plan. The changes introduced by the lower house are minor and in, our view, improve the original proposal. Its centerpieces include reducing tax evasion, expanding the number of taxpayers, improving efficiency of government expenditure, and diversifying revenues streams away from oil revenue. According to the government the goal is to raise non-oil fiscal revenue by 2.8% of GDP by 2012. Currently, the country’s tax collection (10%) is among the lowest in Latin America. Besides, the bill also gives the states the power to levy sales taxes.

The changes from the original proposal are: 1) introduction of a transitional period for the new corporate tax (CETU); 2) new fiscal regime for Pemex and 3) new 5.5% tax on gasoline. The first change grant firms to offset part of their 2007 fixed asset invest against the new flat corporate tax (CETU). The tax will become effective next year at a rate of 16.5 percent and rise to 17.5 percent by 2010. The second modification tends to reduce the implicit tax paid by Pemex to the Federal government. The legislation will provide tax cuts of $2.7 billion in 2008 and as much as $5.4 billion in four years. Such tax cut will free up more cash for Pemex to stem a decline oil production. Finally, the third one (gasoline tax) will be a federal tax whose revenues will be transferred to the states and municipalities.

The allocation of the extra revenues raised by the reform will be decided by the Congress during the budget discussion. However, preliminary remarks by the government suggest that the Congress will allocate the new revenues in three main areas: 1) higher social expenditures; 2) fund the transition costs of switching civil servants’ pensions from a pay-as-you go to a fully funded system; 3) finance Calderon’s infrastructure program.

Lately, we have been talking in the Latin American Economonitor about the urgent need for Brazil to implement a tax reform. It is now time to praise Mexico and their policy makers as an example of responsible administration. Mexico, under Calderon’s, has displayed initiative to handle (and successfully solve) problems that were considered intractable. Maybe Brazilian policy makers could learn something from Mexico’s successful journey.

SOURCE: Vitoria Saddi | Sep 14, 2007


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