Tax overhaul to protect poor: Mexico

By Dave Graham and Michael O’Boyle, Reuters

MEXICO CITY — Mexico’s government is poised to break a taboo and tax some foods and medicine under a tax overhaul proposal but will take measures that shield the country’s poorest, ruling party lawmakers said on Tuesday. The bill will also very likely propose raising the top income tax rate for the wealthiest to as much as 40 percent from 30 percent, several officials from President Enrique Pena Nieto’s Institutional Revolutionary Party (PRI) said on condition of anonymity.

One of the key planks of a wider economic reform program aimed at boosting economic growth, the proposal is set to be unveiled by Pena Nieto on Sunday along with his 2014 budget. It aims to raise the country’s paltry tax take — which was just 9.7 percent of GDP in 2012 excluding the state oil monopoly Pemex — by four percentage points, in part by changing the tax regime for food and medicine, seen by the left as key to protecting Mexico’s poor.

It also seeks to gradually wean the state off dependence on revenues from Pemex to fund the federal budget.

Mexico has the lowest tax revenue in the 34-nation Organization for Economic Co-operation and Development, crippling its ability to spend on health, infrastructure and social programs vital to boost living standards and growth in Latin America’s No.2 economy. The government slashed its 2013 growth outlook to 1.8 percent last month after the economy contracted in the second quarter for the first time in four years, and any tax changes will be phased in gradually, lawmakers said. “There is no need to worry that we would be so insensitive to not note the economic cycle and approve a reform that, instead of being good for speeding up growth in the country, sinks it into a slowdown,” said a senior PRI lawmaker. Several ruling party lawmakers said Mexico’s poorest would be compensated for any change in VAT on food and medicine, probably through their registration on social programs. “I think there will be good news for those people who have less. For those who need daily medicine, those medicines will not be taxed,” PRI Chairman Cesar Camacho told news network Milenio. Exemption For Foodstuffs Basic foodstuffs such as corn, milk and beans, are likely to be exempt from a VAT increase, lawmakers said. The government is also weighing up the benefits of raising taxes on goods like cigarettes, alcohol and soft drinks, lawmakers said on condition of anonymity given political sensitivities.

A flat tax called IETU, which is calculated on a cash flow basis and which critics say adds a layer of complication to filing taxes, will be scrapped, said two PRI lawmakers familiar with the government’s plan. The bill will also impose a tax on financial transactions, two senior PRI officials said, without elaborating on what kind of transactions. Officials have previously said the government is considering imposing a capital gains tax on stock market transactions.

Government officials say that the rich should pay more and that the reform program will close tax loopholes, but have kept silent about its contents. The government has already presented a proposal to overhaul Pemex to lure private-sector investment to the ailing oil sector, as well as bills to overhaul competition in the telecoms sector, boost bank lending and improve education standards. However, it is grappling with mass protests by teachers opposed to the idea of competency tests. Fiery leftist Andres Manuel Lopez Obrador, who was runner up to Pena Nieto at last year’s election, plans a march over the tests on Sunday that he hopes will eclipse the protests he led in 2006 that brought the capital to a standstill.