Mexican tax reform fails

Reforming Mexico’s tax system, which is rampant with corruption and inefficiency, has been a pillar of Fox’s agenda since he was elected in 2000. Mexico raises less revenue through taxation than nearly any other Latin American country, just 12 percent of its $600 billion gross domestic product. Fox has argued that improving tax collection is essential to increasing government investment in such key areas as education, health and welfare programs to alleviate the poverty that afflicts more than half of Mexico’s 100 million people.

The failed plan would have levied a six percent tax on food and medicine, a highly unpopular notion. More generally, the VAT would have been lowered but applied with fewer exemptions. Here is a summary of why the plan failed politically. Now the Fox reformist agenda is considered dead.

The big loser, of course, is Fox. But the reforms were by no means a complete positive. Fox claimed he needed the additional revenue to help the poor, but then why tax food and medicine? If Mexico wishes to raise more revenue, why not simply eliminate VAT exceptions?

Mexico’s low tax collections have been the country’s blessing and curse for many decades. The Mexican economy has been one of the most dynamic of the twentieth century, growing at an average rate of more than five percent per annum. The fiscally starved government, however, has become almost completely corrupt. One reason is that public sector salaries are so low. The time probably has come to improve the quality of the public sector, it now seems that Fox is not the politician to bring the country there. In his three years in office he has yet to win a single major legislative victory.