President Enrique Peña Nieto during the presentation of the fiscal reform. Photo: Reuters
President Enrique Peña Nieto is unstoppable in pursuit of his goal to reshape Mexico’s economy. At the start of this week, he introduced the latest chapter of his reform agenda, a fiscal overhaul that is tightly connected to the energy reform program he put forward less than a month ago. Taxpayers are listening.
One of the main goals in revamping the tax system: to reduce the tax burden on the state oil company Pemex in order to wean Mexico’s government off its fiscal dependency on the out-of-date and inefficient state oil giant. Almost a third of the federal budget derives from taxes on Pemex. The plan would, ultimately, let the oil company keep more of its cash to allocate more resourcefully and invest in improving its performance combined with the planned opening to private companies.
The direct connection between both sets of reforms could prove to be a double edge sword. The success of one is largely dependent on that of the other. Both require Peña Nieto to sustain political consensus across the Pact for Mexico three-party coalition.
Beyond Pemex’s new taxation scheme, the planned fiscal reform includes raising taxes on higher earners. “Those who have more income will pay more,” the president said about a subject that is politically contentious in several other countries. If approved, it would raise the maximum personal income tax rate to 32% from 30% on those earning more than MX$500,000 a year ($38,200) a year, well below the 40% some had predicted. He would also end most corporate tax exemptions and loopholes.
The new tax code, which will require some changes to the Constitution, would also levy a charge on stock market gains. Individuals’ profits from stock sales and dividends would be taxed 10%. Peña Nieto proposed a special tax on soft drinks. Mexico recently surpassed the U.S. to become the country with the highest obesity levels among OECD members. And he put forward a carbon tax on fossil fuels used by industry, a first in Mexico, to combat climate change.
Mexico’s social programs were high on his priority list. After several weeks of protests, ranging from teachers to opponents of energy reforms, Peña Nieto put forward a plan for a universal pension and unemployment insurance to be financed by the state. Developing social security beyond the working force will be quite an undertaking for a country that lacks experience developing social programs to help the poor.
The surprise came at the end of the president’s presentation on his plan at Los Pinos presidential residence in Mexico City. There was no mention of an expected imposition of VAT on staple foods and medicines. Perhaps the protesters’ dissatisfaction hadn’t gone unnoticed by the president or perhaps it was just the economy is too weak now to absorb such a tax hike. It would have been a measure that would have disproportionately affected Mexico’s poor. Three out of five of its citizens still belong to the lower class, according to the country’s statistics institute, INEGI.
Peña Nieto’s new tax code envisages increasing government revenue as a percentage of GDP by 1.4 percentage points next year and by 2.9 percentage points by 2018. At 18.8%, Mexico has the lowest tax to GDP ratio in the 34-nation OECD.
The fiscal reform package is part of the government’s larger plan to revive Mexico’s economy. It comes four months after unveiling financial reforms. Other sectors undergoing a reform process include the education one, recently approved in Congress, and telecommunications. Peña Nieto is aware of the political capital he holds and realizes that it is likely to diminish after his first year in office, which will be on December 1. He is trying to kick start as many reform processes as possible before then and keep Congress busy approving them thereafter.
