Mexico has a revenue problem. It's had a revenue problem for decades. But, due to its dependence on oil revenue (over 38% of its federal budget), and the high price of this commodity, it has been able to avoid an overhaul of its tax code that would lead to higher government receipts.
Currently, Mexico collects about 10% of its GDP in taxes.
(For the sake of comparison, the US (federal + state + municipal) collects over 32% of GDP in taxes, and progressive Western European nations bring in as much as 50% of GDP in taxes.)
Six years ago, when President Zedillo left office, Mexico took in about 11% of GDP. Then, when Conservative Fox acceded to the presidency, he proceeded to slash the top marginal rate (was 35%, now 28%), and promised everyone who would listen (think Heritage Foundation and other WingNuts) that the tax cuts would pay for themselves, that, thanks to a lower top marginal rate, tax receipts as a % of GDP, would climb.
Instead, Mexico lost 10% of its tax tax, which leads us to the present predicament.
The decline in oil prices has negatively impacted Mexico's financial outlook. Last year, it received as much as US$ 65 a barrel for its blend of oil. Yesterday, the country's blend closed at US$ 44.23. In its 2007 budget, it has assumed a price of US$ 42.80. While a stabilization fund may cover some shortfall, if Mexican crude falls below US$ 39 for a extended time frame, government salaries will need to be slashed (they could begin with the salary of the Chief Justice, who makes over US$ 650K a year), and programs cut.
This problem is exacerbated by Cantarell, Mexico's largest oil field. From Saturday's Wall Street Journal.......
http://online.wsj.com/...
Mexico's Oil Output Cools
Slowing of Major Field
May Pressure Prices,
U.S. Import Diversity
By DAVID LUHNOW
January 27, 2007; Page A3
MEXICO CITY -- Daily output at Mexico's biggest oil field tumbled by half a million barrels last year, according to figures released Friday by the Mexican government. The ongoing decline at the Cantarell field could pressure prices on the global oil market, complicate U.S. efforts to diversify its oil imports away from the Middle East, and threaten Mexico's financial stability.
The virtual collapse at Cantarell -- the world's second-biggest oil field in terms of output at the start of last year -- is unfolding much faster than projections from Mexico's state-run oil giant Petroleos Mexicanos, or Pemex. Cantarell's daily output fell to 1.5 million barrels in December compared to 1.99 million barrels in January, according to figures from the Mexican Energy Ministry.
Mexico made up for some of the field's decline. Mexico's overall oil output fell to just below three million barrels a day in December, down from almost 3.4 million barrels at the start of the year. It marked Mexico's lowest rate of oil output since 2000.
Declining production at Cantarell, coupled with the sagging price of Mexican crude, have taken their toll on Mexico's financial picture. Yesterday, Mexico's M24 (Mexico's local currency bond due in 2024) closed at a yield of 8.02%, an increase of 48 basis points over the last month.
http://mx.invertia.com/...
http://mx.invertia.com/...
We have established that Mexico has a revenue problem. There are two ways to solve this. We can raise revenues in a progressive manner, or in a regressive manner. We can embrace President Clinton's economic philosophy, or Bush's.
What did Robert Rubin say just two days after the Democrats won control of Congress, in regards to our own revenue problem?
http://www.economicclub.org/...
Vernon Jordan: Is the economy too weak to increase taxes even on the rich? When can tax revenue be increased without slowing the economy?
Robert Rubin: First place, you cannot solve the nation's fiscal problems without increased revenues. There is nobody that I know of involved in the political system who has put forth serious specific proposals that would get us anything remotely like toward a sound fiscal position for the long term based solely on expense reduction. So, it is going to have to be some combination of revenues and spending discipline. If you were to increase taxes right now, you would have probably about zero negative effect on the economy.
Being a Centrist, Robert Rubin realizes that the country prospered under President Clinton's tax code, that everyone became better off. During President Clinton's last year in office, the federal government took in over 21% of its GDP in taxes.
Regrettably, the people who were fraudulently selected to "lead" Mexico are no Centrists. They are reactionary fundamentalists straight out of Heritage Foundation central casting.
What did Mexico's Secretary of the Treasury say last week, in regards to how he envisions Mexico raising more funds? Answer in Spanish, followed by a translation.
http://www.eluniversal.com.mx/...
Balance general
Aunque se cuidó de no mostrar totalmente sus cartas, en su primera presentación ante un grupo de empresarios el secretario de Hacienda, Agustín Carstens, dejó en claro que el eje de la reforma fiscal que se cocina serán los impuestos al consumo.
Como le adelantamos, pues, la intención es unificar las tasas del Impuesto al Valor Agregado, es decir pasar de cero a 15% las de alimentos y medicinas, a cambio de reducir la del Impuesto sobre la Renta a un nivel idéntico. eliminando de pasadita los regímenes especiales.
Se diría que en términos generales la presentación del funcionario el martes pasado en el Club de Industriales, incluído el diagnóstico de la economía y la agenda de la dependencia, fue bien recibida.
Roughly translated....
http://www.eluniversal.com.mx/...
Balance general
Although he was careful to not fully put all his cards on the table, in his frist presentation before a group of businessmen, the Treasury Chief, Agustin Carstens, made it perfectly clear that the tax reform that is in the works will focus on consumption taxes.
As we have previously stated, the goal will be to homogenize the National Sales Tax, that is, increase the tax of food and medicine from 0% to 15%, in exchange for reducing the top marginal rate to the same level, eliminating any exemptions in the process.
We can say that, in general terms, Carstens presentation at the Club de Industriales was well received (how can it not be, these guys already pay much less in taxes than their US counterparts, and Carstens is promising to lower their tax rate from 28% to 15% -- PatriciaVa), including his economic outlook and his goals at Treasury.
Mexico's tax take, again, is about 10% of GDP.
Why is it so low? You can answer that question by observing how much one of Calderon's friends, Roberto Hernandez, paid in taxes when he sold Banamex to Citigroup. He sold it for over US$ 12B. He paid 0% in taxes.
Yes, Mexico does not have a capital gains tax. Nor does it have significant inheritance taxes. And instead of increasing its already low top marginal rate of 28%, the RightWing reactionary government is hoping to slash it even more.
But the budget will be balanced, and RightWing Reactionaries will attempt to balance it on the backs of the lower- and middle-class Mexicans who, were Calderon to have his way, would begin paying taxes on food and medicine.
Center-left AMLO and other Mexican centrists and progressives have already said that applying the sales tax on food and medicine is a non-starter, and that Mexico should tax the filthy rich. Specifically, they have singled out cases like Roberto Hernandez to argue that Mexico can no longer tolerate such a regressive fiscal code.
As Centrists and Progressives, we must support AMLO's efforts to block a tax hike on the lower and middle-class. Within the past six weeks, Mexican poor have had to withstand a price increase of at least 30% on a basic staple, the tortilla. In some pueblos, the poor have had to pay more than 100% more for a kilo of tortillas.
Now, were Calderon to have his way, those same Mexicans would pay 15% more for their tortillas.