Guest Column
Rendering unto Caesar
- Rendering unto Caesar
- By Kenneth Emmond
- The Herald Mexico/El Universal
- May 14, 2007
One of Mexico’s biggest challenges in its quest for growth and development is the need to convince, coax, cajole, or force more citizens to pay their taxes.
The amount of uncollected money under existing tax law is immense. The Finance Secretariat (Hacienda) estimates that about half a million companies and individuals owe a total of 545 billion pesos (about US$50 billion dollars) — more than one-quarter of this year’s federal budget, not including unpaid state and municipal taxes.
Setting a disgraceful example, even some congressmen are reluctant to pay up: the Superior Audit of the Federation (ASF) reported last December that 110 of the 500 federal deputies from the previous Congress are tax delinquents.
Taxes collected total about 9.5 percent of gross domestic product (GDP), about one-third of the average for members of the Organization for Economic Co-operation and Development (OECD) — a rich-nations club of which Mexico is a member — and less than half the Latin American average.
The level of tax evasion can only be guessed at, especially with a large informal sector, but there’s a major incentive for the government to do better.
Fiscal reform — a rewrite of the nation’s tax laws — is high on the agenda of the present Congress. So optimistic are legislators that party leaders promised to call a special session if it isn’t passed when the current session ends on July 31.
However, reform could be another dead end. Changes might improve the law, but Mexico has a history of passing a new law if the old one isn’t working, when what’s really needed is enforcement of the existing law.
Systemic government corruption is a powerful disincentive. Why pay taxes if you think much of the money will be stolen, especially if no one is going to come after you?
To encourage taxpayers to pony up, Finance Secretary Agustín Carstens has announced a partial tax amnesty.
Tax amnesties have been tried before, but this one comes with both a carrot and a stick. The carrot is that those with tax arrears for 2002 or earlier will be forgiven 80 percent of the outstanding amount, plus fines and interest payments. Those with taxes owing for fiscal 2003-2005 must pay the tax but fines and interest will be forgiven.
Carstens reckons the amnesty will bring in between 10 and 20 billion pesos. If he’s right, he’ll be collecting a pittance — less than 4 centavos on the peso. Critics call it yet another tax break for the rich, but realistically the government would probably collect none of the backlog without the amnesty.
But here’s the stick. The amnesty expires, with no chance of an extension, at year-end.
On Jan. 1, 2008, those who haven’t paid up will be reported to the Credit Bureau. As tax delinquents they’ll find it hard to obtain credit.
Fiscal reactivation — whether by fiat or coercion — has repercussions that spill over into the energy sector. The only reason Mexico’s public finance system works at all — the reason there are funds for health care, education, infrastructure, and other services even at today’s inadequate levels — is that the government systematically makes up the tax shortfall by harvesting revenues from Petróleos Mexicanos (Pemex), the national oil monopoly.
In other words, the main beneficiaries of Mexico’s petroleum riches, which as we are constantly reminded belong to all the people, are the nation’s tax deadbeats.
Last year, thanks to historically high oil prices, Pemex provided a whopping 38 percent of federal revenues. Emasculating Pemex has for decades robbed it of funds for exploration and maintenance; now it’s almost bankrupt.
With petroleum reserves dropping at an alarming rate, the prospect of lower oil prices, and a crying need for substantial new investment in Pemex, the government must do something.
That newfound desperation, plus the negotiating skills of President Calderón, provides the basis of whatever optimism there is for fiscal reform.
Tax reform is a nebulous issue. What will the new fiscal regime will look like?
Some legislators want to see a flat tax — a single levy, applicable to everyone, without loopholes. It’s worked surprisingly well in some countries, most notably in Estonia.
The flat tax seems to fly in the face of progressive taxation, under which high-income people pay higher rates. However, “progressive” systems have so many deductions, incentives, and loopholes that wealthy taxpayers often end up paying less than wage-earners, while everyone must wade through a mountain of paperwork.
Simplicity is another flat tax advantage — significantly lower costs of assessment and collection. However, its apparent inequality means most politicians would likely oppose it.
One solution, which operates in countries like Canada (which has a complex income tax system but also a regressive value-added tax), is to tax rich and poor alike, while providing a value-added tax credit in the form of a refund for those reporting low incomes.
Tax credits are a complicated way to equalize the tax burden, but they provide an incentive for people to participate in the tax-reporting process.
- Taxes are never welcome. Yet, if people believe they are being taxed fairly and equitably, and that they receive value for their tax pesos, that in itself would go a long way toward simplifying tax collection.
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- Kenneth Emmond is a freelance journalist and economist who has lived in Mexico since 1995. You can reach him at kemmond00@yahoo.com.
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