Fiscal Challenges

José Luis Calva says that Mexico can raise its tax collection by a factor of 10 percent of the GDP, and offers a five-point plan:

The challenge is formidable, but successfully confronting it is feasible with an integral package of reform measures.

First: widen the base of contributors and of income subject to taxation. The taxable possibilities in this direction are enormous: 1) tax the market earnings of people, as happens in developed countries, 2) tax inheritances with elevated progressiveness, which is also done in a great part of the world; 3) tax peoples' capital earnings, as is also done in industrialized countries; 4) prudentially tax foreign capital, as is the case in Chile and other countries; 5) incorporate the large and medium-sized "informal economic" entities into the tax regime.

Second: improve collection and resolutely combat tax evasion.

Third: simplify and streamline tax legislation with the goal of facilitating the payment of taxes and limit accounting practices that reduce businesses' taxable earnings to ridiculous levels.

Fourth: accentuate the progressiveness of the taxes on profits, preferably through the introduction of local taxes on income, similar to the state or local taxes in place in the United States, Canada, and other nations. Adding the profit taxes from central governments to the local tax, the maximum profit tax rate is 46.4 percent in Canada; 41.3 percent in the US; 44.3 percent in Germany; 45 percent in Spain; 43.4 percent on average in the countries of the EU; and 40.4 percent on average among the countries of the OECD (OECD in Figures 2008 Edition). The introduction of a state tax on profits would reinforce the material base of economic authority of the states; and it can be combined with direct collection at a municipal level of taxes under the small contributor regime.

Fifth: introduce a greater differentiation in the rates of the Value-Added Tax, in such a way that luxury goods and services (or of consumption that is basically restricted to the highest income stratum) are taxed at rates of greater than 15 percent, keeping the zero rates in place and the exemptions for basic goods and services.