Magazine article SourceMex Economic News & Analysis on Mexico

President Vicente Fox Submits Tax-Reform Plan amid Strong Opposition in Congress

Magazine article SourceMex Economic News & Analysis on Mexico

President Vicente Fox Submits Tax-Reform Plan amid Strong Opposition in Congress

Article excerpt

President Vicente Fox Quesada has submitted his tax- reform plan to Congress, but the measure could be doomed unless the executive and the legislature are able to reach a compromise on several controversial proposals.

The most contentious proposal in the Fox tax plan is the implementation of a 15% value-added tax (impuesto al valor agregado, IVA) on food and medicine, currently exempt from taxes. Fox has also proposed the 15% IVA on public transportation, construction materials, books, and other items currently exempt from the tax, which is charged at the retail level.

The additional income from the IVA could help Mexico increase its overall tax collection by about US$12.4 billion, or about 13.6% of GDP, the Fox administration contends. Mexico's current tax-collection rate of 11.6% is one of the lowest in the world.

The plan also simplifies the tax code and reduces corporate and income-tax rates, including the impuesto sobre la renta (ISR), in an effort to reduce tax evasion among individuals and businesses.

Some political experts say the Fox administration views the overhaul of the tax system as necessary to obtain the revenues needed to expand education, health care, and other programs.

"There will be no money to finance [the administration's] very ambitious programs unless they implement a massive tax reform," said political scientist Denise Dresser of the Instituto Tecnologico Autonomo de Mexico (ITAM).

Opposition widespread in Congress to tax on food, medicines

The problem for Fox is that all the major political parties plan to oppose his overall tax plan unless the proposed IVA is removed or modified significantly. The center-left Partido de la Revolucion Democratica (PRD) and the long-governing Partido Revolucionario Institucional (PRI) have already formed a coalition with four minor parties in the Chamber of Deputies to block the tax-reform plan.

Fox's pro-business Partido Accion Nacional (PAN) has offered varying degrees of support for the plan. The strongest criticism has come from PAN Sen. Fauzi Hamdan, who chairs the finance committee (Comision de Hacienda) in the upper house.

"[The IVA proposal] fails to meet all three basic criteria, which are to simplify the tax code, to boost tax revenues, and to develop a just tax system," said Hamdan.

The PAN senator said Congress is willing to negotiate a viable tax-reform package, but the plan will have to undergo many changes. "Without any doubt, there is going to be tax reform," said Hamdan. "But not in the terms proposed by the executive."

Deputy Felipe Calderon, who leads the PAN delegation in the Chamber of Deputies, said the party could back Fox's plan after the executive "reconsiders" several points.

The call for compromise is not as strong among members of the PRD and the PRI, both of which rebuffed Fox's last-minute efforts to gain their support for the tax plan.

PRD president Amalia Garcia and legislative leader Marti Batres Guadarrama have strongly denounced the proposal to tax food and medicines and have pledged to "mobilize" citizens around the country if Fox insists on pushing it through.

"We are going to meet with all the social sectors and will take all the necessary political actions to prevent another blow to the popular economy," Batres said in a press conference.

Mexico City Mayor Andres Manuel Lopez Obrador, also a member of the PRD, disputed Fox's contention that the increased tax revenues would be used for social programs. He said the president wants to use the tax collections to retire public debt, including costs incurred with the rescue of the banking system via the Fondo Bancario de Proteccion al Ahorro (FOBAPROA) and its successor, the Instituto de Proteccion al Ahorro Bancario (IPAB). Lopez Obrador, a former PRD president, was one of the most vocal opponents of using public funds to rescue the Mexican banking system (see SourceMex, 1998-08-26). …

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