Tax Debate

Increased concern about Mexico's lack of revenue has revived the debate about extending the Value-Added Tax to food and medicine. Without some sort of exemption for Mexico's poorest, the measure seems no more likely to pass today than it was a few weeks ago after Calderón mentioned it in an appearance before a group of businessmen in Saltillo.

Update: In response to a question of mine at his blog, Noel Maurer elaborates on the potential of an income-based deduction or credit accompanying the VAT in Mexico:

The politics of any sort of tax are dicey. A tax credit, per se, would be fairly cumbersome to administer; people would need receipts and the like. On the other hand, you could have a simplified tax credit, although you'd still need somehow to verify that people were below the ceiling, and write up some sort of marginal schedule for its phase-out. After all, you wouldn't want a situation where your tax bill suddenly jumps once an arbitrary threshold is crossed.

Feeding that into the legislative machine can be a nightmare, which is why Mexico hasn't done it yet.

The U.S. allows you to deduct estimated sales tax payments, which is conceptually similar. In addition, the U.S. has the EITC, which has the same effect as the tax credit you propose, although it isn't explicitly linked to sales tax payments. Several OECD members have a similar system: Austria, Belgium, Canada, Denmark, Finland, France, Ireland, the Netherlands, New Zealand, and Sweden. (Australia has a complex system that seems to effectively mimic an EITC, and Spain has one for families with children.) Unlike Mexico, however, most labor in those countries is in the formal sector, so administration is easy.

The easiest thing in Mexico, I think, would be a massive expansion of Oportunidades. Of course, that could have the effect of turning it into a simple entitlement, which would be good for the country in general but might lead to the disappearance of the program's success in promoting very poor families to invest more in their children.