Let's agree on a couple of points: No one in any country likes to pay
taxes. And everyone expects the taxation system to be fair.
Taxes are necessary to run the government who needs the money to provide
the services that the people rightfully expect. The tax system can also be a
very powerful tool to encourage the population to do things beneficial to the
country.
What brings this to mind are some statements made by the Mexican
Secretary of Economy, Eduardo Sojo in the last week of April. The secretary
expressed concern that México, as a country has slipped two places in
competitiveness (from 33rd to 35th) on a list of 45 countries in terms of its
attractiveness to investors according to the Mexican Institute for
Competitiveness.
Sojo also said that while México has grown at its fastest rate in the
past 6 years, the growth potential could be greatly improved by "structural"
reforms and opening up sectors to greater competition. Progress is underway on
breaking the hold of monopolies in México recently, but it is the "structural"
that I address today.
The tax system could be of great help here. It can be used to encourage
investments in more efficient factories, more efficient workers and, at the
same time, to create more general wealth. Progressive countries in the first
world give tax incentives to companies that invest in more efficient processes
and to educate their staffs for more productivity.
But the Mexican system only offers a 5 to 10 years write off on income
for the purchase of equipment. No tax credits. Nothing for "green" investments
to promote fuel efficiency and nothing for employee education. And travel and
expense deductions for companies are so complex and limited that it can be
ignored. The underground economy is easier to deal with.
The Mexican system is designed to discourage even forming a legitimate
business. As an example, a two bit mom and pop business grossing $15,000 USD
per year is required to fill out 17 pages of forms (most with nothing but
zeros filled out) for the annual tax declaration. And if one zero is out of
place, you are in trouble. Short form return available? You have to be
kidding. Additionally, two page monthly reports are required. And if you close
down the business, you will still have to fill out 17 pages yearly with zeros
for 3 or 4 years.
It's no wonder then that a massive amount of businesses, representing
almost 50% of the GDP, are "off the books", (the underground economy). The
sector that pays no taxes and those working for this sector and get no
government benefits (like Social Security that in México is the national
health system). We should note that México collects taxes at almost the lowest
rate in Latin America at only 11% of their GDP (Gross Domestic Product).
México now finds itself between a rock and a hard place because over 30%
of the cost of operating the government comes from the 60% tax rate on the
technically bankrupt national oil company, PEMEX. And that cash cow is rapidly
shrinking because our major oil field drying up at over 5% per year. At the
high tax rate on PEMEX, no money is left for exploration for deep-water fields
to replace the existing shallow depleting fields or even proper maintenance on
their plants.
The tax collection system is not only too narrow, but what is left is
riddled by rampant tax evasion and corruption.
The answer is complex. By allowing so large an informal sector in the
economy for so long, to try in one fell swoop to suddenly eliminate this
illegal sector would lead to extreme instability. In some areas where the law
has tried to shut down illegal market operations, riots erupted. You can't
ignore the precedence that no enforcement of the laws for so long has created.
Therefore, the "structural" reforms referred to are needed: A tax system
that is fair and efficient and a legal system that works to enforce the tax
codes. A tax code that encourages doing business in more efficient ways
including a government spending process that convinces the taxpayers that
their money is being spent wisely. Above all, a taxation environment that
encourages more participation of legal businesses.
Yes, a good tax system can encourage the economy to increase
productivity, but it has to have a much wider base.
I can remember operating a business in the US and coming to the end of
the fiscal year. My accountant would say that we were going to pay too much
taxes and would suggest doing something to modernize (increase efficiency) in
an equipment purchase to lower the taxes.
Wake up México. You can create a powerful tool to increase competitivity
if you just looked.
México requires a fair and efficient tax system with the legal structure
to get the participation to make it work and encourage moving to a more
competitive México.
And a tax system that doesn't make honest taxpayers feel like fools.
_____________________________________
Richard N. Baldwin T., a HispanicVista.com (http://www.hispanicvista.com/)
contributing columnist, lives in Tlalnepantla, Edo de México. E-mail at:
R1041643422@aol.com
By
Richard N. Baldwin T. /HispanicVista.com