Mexico is an open economy with strong real and financial links to the rest of the world with risks of spillovers from global turbulence. Recent gains in market share in the U.S. manufacturing market are owed to improved relative unit labor costs and reemergence of a location advantage. Mexico’s current fiscal framework requires measures to offset the emerging challenges of a decline in oil revenues and the projected increase in health- and pensions-related spending. The sustained increase of bank credit after the global crisis has been reversed. The effects of migration depend on labor reform.

Abstract

Mexico is an open economy with strong real and financial links to the rest of the world with risks of spillovers from global turbulence. Recent gains in market share in the U.S. manufacturing market are owed to improved relative unit labor costs and reemergence of a location advantage. Mexico’s current fiscal framework requires measures to offset the emerging challenges of a decline in oil revenues and the projected increase in health- and pensions-related spending. The sustained increase of bank credit after the global crisis has been reversed. The effects of migration depend on labor reform.

III. The Case for Tax Revenue Mobilization in Mexico1

A. Introduction

1. Mexico’s current fiscal framework is a sound basis for fiscal sustainability, but over the medium term it will require measures to offset emerging challenges. Two of the most important challenges are: (i) a decline in oil revenues as a share of GDP as the economy grows (even with oil production increasing to its 2004 peak over the medium term and with oil prices remaining at its current levels); and (ii) the projected increase in health- and pensions-related spending due to aging. More generally, Mexico also needs to further rebuild fiscal buffers as a protection against possible negative shocks from the fragile global economic environment.

2. The need to anticipate and overcome these challenges creates a strong case for additional domestic revenue mobilization. The case appears even stronger when looked at from an international perspective: Mexico’s low levels of non-oil tax collection compared with OECD countries and regional peers mean that there is space for revenue mobilization to avoid compressing public spending excessively, including public investment and social spending.2

3. This paper summarizes the nature of these challenges and examines the characteristics of Mexico’s tax system from an international perspective. It highlights areas in which the country lags behind comparator countries in terms of tax yields, looks at the distributional impact of the taxes, and quantifies the potential gains from some options to boost tax collection under different scenarios.

B. Macroeconomic Considerations for Revenue Mobilization

4. Following Mexico’s fiscal stimulus in 2009, gradual fiscal consolidation efforts have partly reversed the change in the fiscal position but are yet to restore previous levels of fiscal buffers. Fiscal adjustment since 2010 has helped stabilize the gross public debt ratio at about 43 percent of GDP, but debt has yet to come down to pre-crisis levels (about 37 percent of GDP). Stepping up consolidation efforts to return to Mexico’s primary surplus before the global crisis, would put the debt ratio on a more sustained downward path (which is particularly important in the present juncture of heightened global risk). But rebuilding fiscal buffers, which in the wake of a crisis can be a lengthy process, will be complicated by the need to cope with the projected substantial medium-term decline in oil revenues and the significant upward pressure on health- and pensions- related spending. Pressures on revenues and expenditure, projected at 4–5 percent of GDP over the next decades, appear manageable, but revenue mobilization efforts would be necessary in order to avoid an excessive compression in other expenditures.

5. Oil revenue is projected to decline by 2–3 percent of GDP through 2030, from its current level of 7.6 percent of GDP. Even if production were to return to its 2004 peak by 2030 (3.4bn barrels per day) and the real price of oil were to remain constant at its 2011 level, oil revenue would drop by about 2.1 percent of GDP over the period.3 Instead, if production were to remain constant at current levels (2.5bn barrels per day), the contraction in oil revenues would be worse—about 2.8 percent of GDP. At worst, if production stays stagnant and oil prices decline as projected by the IMF’s World Economic Outlook through 2017 (remaining constant thereafter), by 2030 oil revenue would fall by 3.3 percent of GDP.4

Figure 1.
Figure 1.

Mexico: Selected Fiscal Sector Indicators

(in percent of GDP)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

Source: SHCP and IMF staff calculations.

6. Health- and pensions-related spending are projected to increase by over 2 percent of GDP through 2030.5 The increase in pension costs (about 1.2 percent of GDP) will be driven mostly by population aging (assuming no offsetting factors such as an increase in the retirement age or further reforms to the system). Health care spending is projected to rise by 1 percent of GDP over the same period, also due to aging (which explains about 60 percent of the additional spending) and by the fact that health costs grow faster than GDP as technological medical advances are adopted. Mexico’s projected increase in spending—both for pensions and health care—is in line with expected medium-term trends in other emerging-market economies (Figure 2).

Figure 2.
Figure 2.

Public Spending in Health and Pensions

(in percent of GDP)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

Sources: Escolano et al (2012) and staff calculations.

C. Mexico’s Tax System: A Cross-Country Perspective

7. Revenue collection in Mexico is low by regional and OECD standards. Although differences in accounting practices across countries make precise comparisons difficult, Mexico’s tax revenue appears as an outlier taking into account income levels and collection ratios of comparator countries (Figure 3).6 At the general government level, Mexico’s total tax revenue in 2010 was not much more than half of the OECD average (18 percent of GDP compared with 34 percent).7 It was also significantly lower than in other LAC5 economies.8 If oil revenues are excluded, the difference with comparator countries is even more pronounced.

Figure 3.
Figure 3.

Total Tax Revenue and Income Levels

(OECD and Argentina, Brazil and Colombia; 2006-10 unweighted avg)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

Note: Data refer to the general government level.Source: IMF staff calculations based on OECD revenue database and WEO.

8. Mexico’s low revenue ratio is explained by several factors. Some of the difference is due to design choices in tax structures or in public institutions. For instance, taxes on income, profits and capital gains are lower because the PIT and CIT are fully integrated (with full imputation of dividend tax at the personal level). While this reduces the total take of taxes on profits and capital, it has good efficiency properties (low effective taxes on capital). Likewise, unlike countries with traditional pay-as-you-go public pension systems, Mexico does not include employer and employee contributions to pensions in the fiscal accounts—since these are recognized as being part of individual saving. However, Mexico’s revenue is also low because of: a relatively low tax compliance rate (in part due to informality in the economy); weaknesses in tax administration; a very low tax collection at the subnational level; and a somewhat narrow tax base (owing to differentiated rates and deductions in key taxes coexisting with special tax regimes) (OECD, 2011).9

9. Amid low income taxes and social security contributions, the tax structure in Mexico depends significantly on indirect taxation. While tax collection on goods and services in Mexico is broadly in line with OECD countries, income taxes (and social security contributions) represent a substantially lower share of total revenue (Figure 4). This makes overall tax collection in Mexico particularly reliant on indirect taxation compared with OECD and G7 countries—a characteristic also shared by the rest of the LAC5 (Figure 5).10

Figure 4.
Figure 4.

Total Tax Revenue Collection in 2010 1/

(selected countries; in percent of GDP)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

1/ General government level. Data on Argentina, Brazil, Colombia, Poland and OECD average refer to 2009.Sources: OECD, Revenue Statistics Database and Latin American revenue statistics.
Figure 5.
Figure 5.

Direct-to-Indirect Tax Ratios Across Country Groups

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

Note: data refer to the general government level.Source: IMF staff calculations based on OECD revenue statistics database.

10. The share of oil revenues has increased significantly since 2002, due to the increase in international oil prices (Figure 6). Despite growing diversification in Mexico’s economy, dependence of the public finances on oil production has not declined, missing an opportunity to diversify sources of revenue in line with the rest of the economy.11 Due to the significant increase in fuel subsidies, the share of excises declined sharply over the period, as these are accounted for as a negative excise.12 Property taxes, which are collected at the subnational level, contribute less than 2 percent of total revenue—a share that has remained broadly constant over time.

Figure 6.
Figure 6.

Mexico: Structure of Tax Revenues in 2002 and 2010

(in percent of total tax revenues)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

Source: OECD, Revenue Statistics Database.

D. Overview of Mexico’s Tax System

Value Added Tax (VAT)

11. Mexico’s VAT collection is below OECD and regional standards. VAT revenue, at 3.9 percent of GDP in 2010, stood significantly below the OECD and LAC5 average collection of around 6.7 percent of GDP.13 However, Mexico’s VAT statutory rate, currently at 16 percent, is not significantly below the OECD’s (currently at around 18 percent). Instead, the underperformance of the VAT in Mexico is mostly associated with exemptions and reduced VAT rates which, combined with the informality in the economy, have substantially narrowed the tax base (OECD, 2011).14 The reduced VAT rate at Mexico’s borders, unique among LAC5 or OECD countries, has also contributed to erode the overall VAT base.15 These special regimes have been reflected in the low VAT revenue ratio (actual collection over theoretical revenues derived from applying the standard rate to all final consumption), which is the lowest among OECD countries.16

Figure 7.
Figure 7.

Selected Countries: VAT collection in 2010 1/

(in percent of GDP)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

1/ Data for Argentina, Australia, Brazil, Colombia, Greece, Ireland, Netherlands, Poland, and OECD average refer to 2009.Sources: OECD, Revenue Statistics Database and Latin American revenue statistics.
Figure 8.
Figure 8.

Selected OECD Countries: VAT Trends

(in percent)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

Source: OECD, 2010, Consumption Tax Trends.

Income taxes

12. Despite statutory rates broadly in line with comparator countries, Mexico’s income tax revenues are low. The combined income tax revenue in Mexico (PIT and CIT), at 5 percent of GDP in 2009, is significantly below OECD levels—although, as noted, some of this can be explained by the full integration of the PIT and CIT.17 Statutory rates for the PIT and CIT, at 30 percent, are broadly in line with comparator countries.18 Mexico’s low income tax revenue collection reflects a combination of special regimes, widespread deductions and low compliance (OECD, 2011).

Figure 9.
Figure 9.

Selected OECD Countries: Income Taxes

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

1/ For a single person without dependants based on the earnings level where the top statutory personal income tax rate first applies.2/ Basic combined central and sub-central (statutory) corporate income tax rate given by the adjusted central government rate plus the sub-central rate.Sources: OECD, Revenue Statistics, Tax Database, Corporate and Capital Income Taxes and Taxing Wages Databases.

Subnational revenues and property taxes

13. Mexico’s revenue mobilization at the subnational level is very low compared with OECD and regional peers. At end-2009 subnational tax revenue collection reached 0.7 percent of GDP, about the lowest among OECD and LAC5 economies (Figure 10). Inadequate incentives, associated with the high reliance on transfers from the central government, and the high turnover of elected local authorities have underlain Mexico’s subpar revenue performance at the subnational level.19 This is seen especially in the low yield of property taxes in Mexico (which represent a substantial share of local taxation in most other countries), a phenomenon also explained by outdated property values. Other subnational tax bases could also be strengthened: small taxpayers (REPECOS), the local gasoline tax (administered by states), and the local vehicle-ownership tax, among others.

Figure 10.
Figure 10.

Subnational Government Revenue and Property Taxes, 2009

(in percent of GDP)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

Sources: OECD, Revenue Statistics Database and Latin American revenue statistics.
Table 1.

Selected Countries: Structure of Property Taxes in 2009

(in percent of GDP)

article image

excludes impuesto a los depósitos en efectivo (IDE) in the case of taxes on financial and capital transactions.

Source: OECD, Revenue Statistics Database.

Environmental taxes

14. Environmental taxes in Mexico are an outlier in international comparison. In 2010 these taxes generated negative net revenues due to Mexico’s fuel subsidies (-0.3 percent of GDP).20 Other environmentally-related taxes—such as those on pollution, transport or energy excluding fuels—have also shown a relatively weak performance from a crosscountry perspective. This becomes apparent when considering the 2.6 percent of GDP collected by the EU27 in environmental taxes on average, with fuel taxes representing 1.6 percent of GDP (Figure 11).

Figure 11.
Figure 11.

Selected Countries: Environmental Taxes in 2010

(in percent of GDP)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

Source: European Commission, Taxation Trends in the European Union; and OECD/EEA database on environmentally related instruments.

Tax expenditures

15. Mexico’s tax expenditures appear large, representing about 2.8 percent of GDP in 2009.21 These expenditures are associated with income taxes (1.3 percent of GDP), VAT (1.3 percent) and other taxes and tax reliefs (0.2 percent). International comparison, with all the caveats needed due to differences in methodologies to estimate them, show that Mexico’s tax expenditures appear relatively high in recent years (Table 2). These tend to also be poorly targeted while adding significant complexities and inefficiencies to the system.22

Table 2.

Tax Expenditures: Estimates in Latin America

(in percent of GDP)

article image

Mexico’s estimate in 2008 and 2009 excludes tax expenditures and collection of the IETU (see Annex). Sources: Secretaría de Hacienda y Crédito Púb lico (SHCP): Presupuesto de Gastos Fiscales, various issues; and Villela et al (2010).

16. Tax expenditures associated with the export assembly sector (Maquiladoras) are significant and lead to important inefficiencies in the tax system. This regime currently provides substantial benefits to firms in terms of VAT, income taxes, and import tariffs, involves substantial fiscal costs, opens windows for tax planning and, over time, it has moved away from its initial objectives. To qualify as a Maquiladora, a firm currently needs to sell abroad only 10 percent of total sales; moreover, rules limiting eligible firms to border areas have been relaxed. This implies that in practice a large share of firms receiving these benefits produce goods and services that are sold in the domestic market.23

Distributional aspects

17. The distributions of income and tax collection in Mexico across households’ income deciles are broadly aligned. According to the latest National Survey of Household Income and Expenditure (SHCP, 2011a), the highest three deciles of the income distribution obtain 67 percent of gross national income and contribute with about 70 percent of total taxes (82 percent for income taxes). The three lowest deciles of the distribution instead receive 6 percent of gross income and contribute 5 percent of total taxes (8 percent for the VAT).

Figure 12.
Figure 12.

Income and Tax Distribution by Income Decile

(in percent)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

Sources: based on SHCP (2011a)

18. Explicit and implicit subsidies in Mexico tend to benefit households at the higher end of the income distribution. The regressive structure of subsidies is particularly apparent in the case of fuel subsidies and residential subsidies for electricity. VAT exemptions and reduced rates also tend to be regressive, although less so in the case of zero-rated VAT goods. In all, tax expenditures in Mexico do not appear to be effective to help redistribute income to the most vulnerable groups.24

Figure 13.
Figure 13.

Selected Implicit Subsidies by Income Decile

(in percent)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A003

Sources: based on SHCP (2011a)

19. Mexico’s conditional cash transfers program Progresa/Oportunidades has been particularly effective in improving the after-transfers distribution of income. Recent estimations suggest that the program is a good example of redistributive efficiency, in the sense that it spends 0.36 percent of GDP and helps explain approximately the largest share of the post-transfer improvement in Mexico’s Gini coefficient after including programs targeting the poor (Esquivel et al, 2010).

E. Options to Strengthen Revenue Mobilization

20. To strengthen Mexico’s revenue mobilization, efforts could focus on broadening the tax base through the elimination of tax expenditures, combined with improvements in tax administration to enhance compliance. Mexico’s statutory rates appear broadly in line with key comparator countries, which suggest that priority should be given to efforts to widen the tax bases and strengthen administration. Table 3 illustrates a number of areas where tax collection can be strengthened (to achieve levels closer to comparator countries) and presents indicative estimates of potential revenue gains.25 Key measures include:

Table 3.

Quantification of options to increase non-oil tax revenue

(in percent of GDP)

article image

lower bound: SHCP 2010 estimates of VAT tax expenditure; upper bound: average 2008 revenue ratio of OECD.

estimatation of 2010 fuel subsidy.

fuel taxes observed in Spain in 2010.

lower bound: to reach 2009 LAC5 average level; upper bound: to reach 2009 OECD average level.

lower bound: SHCP 2010 estimates of PIT tax expenditure on various personal deductions; upper bound: includes reduction of various tax expenditures on wage income.

lower bound: SHCP 2010 estimates of PIT tax expenditure on special regimes for Maquiladoras and vehicles up to Mex$ 175.000; upper bound: includes reduction of tax expenditure on employment subsidy and other CIT deductions.

Source: Secretaría de Hacienda y Crédito Público (SHCP) and IMF staff calculations.
  • VAT: reduced rates and exemptions should be revisited with the aim of eliminating them over time—in particular, the lower border rate is a concession not found elsewhere The lower bound of potential gains (from cutting tax expenditure) is estimated at 1.3 percent of GDP;26 more ambitious efforts could bring about 2.3 percent of GDP in additional revenues (to achieve a VAT revenue ratio closer to the OECD average).27

  • Environmental taxes: subsidies to gasoline and diesel should be eliminated over time, a measure that would increase revenue collection by about 0.6 percent of GDP. In addition, if Mexico were to tax fuels at the low end of the EU27 level,28 Mexico’s environmental taxes would yield an additional 1 percent of GDP, which Mexico has done in the past.29

  • Subnational taxes: As regards property tax, updating land registers and property values while improving administration and tax enforcement at the local level appears necessary to mobilize subnational revenue. This would help reach immovable property tax revenues closer to the LAC5 average (0.4 percent of GDP) while setting the ground to achieve OECD average collection levels over time (1.1 percent of GDP). Other taxes and special regimes should also be strengthened to further increase subnational revenue—e.g., small taxpayers regime (REPECOS), the local gasoline tax (administered by states), and the local vehicle-ownership tax and payroll tax among others.30

  • Elimination of other key tax expenditures:31 tax expenditures associated with the purchase of new vehicles and other personal deductions should be revisited; similarly, special regimes such as that for the Maquiladora sector could be phased out. These measures could tentatively yield 0.5 percent of GDP in additional revenue. If employment subsidies and special deductions for wages and salaries were reduced (as in Table 3 below), income tax revenues could increase by 1.1 percent of GDP.32

21. To alleviate potentially adverse effects of revenue mobilization efforts on the poor, well-targeted social protection measures could be considered. The revenue gains associated with the increase in tax revenue would allow some resources to be allocated to social programs to alleviate the negative effects of the reforms on the poor. Moreover, in the context of needed reforms to boost Mexico’s growth potential, increasing social spending with high social return would help provide the basis for higher growth.

Appendix 1. Mexico: Breakdown of Tax Expenditures in 2008, 2009, and 2010

article image
Sources: Secretaría de Hacienda y Crédito Público (SHCP): Presupuesto de Gastos Fiscales, various issues, and IMF staff calculations.

excludes tax expenditures and tax collection of IETU.

includes: food, medicines, books and newspapers, imported goods by Maquiladoras, hotels services used for conventions, and other goods and services.

includes: medical, educational and transport services, cultural events and housing.

may differ from actual figures due to differences between projections and outturns.

as reported by Mexican authorities in Presupuesto de Gastos Fiscales, various issues.

References

  • Escolano, J., T. Komatsuzaki, B. Shang, and M. Soto, 2012, “Long-term projections of public spending and revenue for the pension and health system,” IMF Technical Assistance Report (Washington).

    • Search Google Scholar
    • Export Citation
  • Esquivel, G., N. Lustig, and J. Scott, 2010, “Mexico: A Decade of Falling Inequality: Market Forces or State Action?,” Unpublished Manuscript. http://www.noralustig.org/wp-content/uploads/2011/08/Esquivel-Gerardo-Nora-Lustig-John-Scott.A-Decade-of-Falling-Inequality-in-Mexico-Market-Forces-or-State-Action.Chapter-7.pdf

    • Search Google Scholar
    • Export Citation
  • Gómez Sabaini, J. C., and J. P. Jiménez, 2011, “Tax structure and tax evasion in Latin America,” Serie Macroeconomía del Desarrollo, No, 118.

    • Search Google Scholar
    • Export Citation
  • Keen, M., G. Palomba, and Ch. McPherson, 2009, “Mexico: Selected Tax Reform Issues,” IMF Technical Assistance Report (Washington).

  • Lopez-Murphy, Pablo, 2011, “Long-Term Fiscal Challenges in Mexico,” Selected Issues Paper, IMF Country Report No. 11/249, pp. 2738.

    • Search Google Scholar
    • Export Citation
  • OECD, 2010a, Tax Policy Reform and Economic Growth, OECD Publishing.

  • OECD, 2010b, Choosing a Broad Base–Low Rate Approach to Taxation, OECD Publishing.

  • OECD, 2011, Economic Surveys: Mexico, OECD Publishing.

  • SHCP (Secretaría de Hacienda y Crédito Público), 2011a, “Distribución del pago de impuestos y recepción del gasto público por deciles de hogares y personas: Resultados para el año 2010,” SHCP Publishing.

    • Search Google Scholar
    • Export Citation
  • SHCP (Secretaría de Hacienda y Crédito Público), 2011b, “El Impuesto Empresarial a Tasa Única (IETU): Un diagnóstico a tres años de su implementación,” SHCP Publishing.

    • Search Google Scholar
    • Export Citation
  • Villela, L., A. Lemgruber and M. Jorratt, 2010, “Tax Expenditure Budgets,” IDB Working Paper No. IDB-WP-179.

1

Prepared by Santiago Acosta-Ormaechea.

2

Non-oil tax collection in Mexico was about 10 percent of GDP in 2011.

3

Projecting oil revenues boils down to assessing the likely paths for oil production and international oil prices. These projections keep real GDP growth at its potential rate, the real exchange rate constant and other key parameters roughly unchanged.

4

The estimation approach considered here largely follows Lopez-Murphy (2011).

5

See Escolano et al (2012). These figures refer to the consolidated general government.

6

Mexico’s measured taxes depart from the GFSM 2001 standard in that some revenues are shown net of subsidies (for instance, gasoline and electricity tariffs).

7

The OECD Revenue Statistics Database, oil-related tax revenue is included in Mexico’s total tax revenue.

8

The LAC5 group refers to the 5 largest Latin-American economies: Argentina, Brazil, Chile, Colombia, and Mexico.

9

For tax collection at the central government level, differences are less pronounced: Mexico collected about 17 percent of GDP in 2009, whereas the OECD average was about 25 percent of GDP.

10

Direct taxes in Figure 5 include: taxes on income, profits and capital gains, social security contributions, taxes on payroll and workforce and taxes on property. Indirect taxes, in turn, include: taxes on goods and services and other taxes.

11

Despite the changes in the structure of the economy, the contribution of income taxes (PIT and CIT) has remained broadly unchanged in this period, accounting for about one fourth of total revenue. Similarly, VAT continues to account for about one-fifth of total tax revenue.

12

In 2002 fuel excises generated revenue of about 1.6 percent of GDP, whereas in 2010 they reached -0.6 percent of GDP (negative because of the net impact of the fuel subsidy). Over the period 1980–2005, fuel excises were on average about 1 percent of GDP.

13

Mexico’s VAT collection was 3.7 percent of GDP in 2011.

14

The VAT has zero rates for food and medicines and exemptions for services such as education and health.

15

Mexico has a differential border rate of 11 percent, which according to official estimates entails a tax expenditure of about 0.13 percent of GDP.

16

This measure of the effectiveness of the VAT is also referred to as VAT C-efficiency ratio.

17

In addition, the OECD’s revenue statistics database defines two categories for taxes on income (profits and capital gains of individuals and corporates) which exclude other income taxes (such as Mexico’s recently-implemented Impuesto Empresarial a Tasa Unica (IETU)) that cannot be directly allocated to either of them. This latter tax yielded about 0.4 percent of GDP in 2009. However, even after taking into consideration these caveats, Mexico shows a particularly low yield for income taxes. See SHCP (2011b) for details.

18

In 2011 the average top PIT statutory rates in the LAC5 and OECD were 31 and 42 percent, respectively. Average top CIT rates for LAC5 and OECD were 30 and 26 percent, respectively. See Sabaini and Jiménez (2011) for further discussions on the characteristics of income taxes in Latin-American countries.

19

Transfers from the central government currently represent more than 90 percent of subnational level revenues.

20

The average revenue from fuel excises between 1980 and 2005 was 1 percent of GDP. However, in recent years, higher subsidies to the consumption of gasoline and diesel led to a net negative collection of these excises (0.6 percent of GDP in 2010).

21

The estimate in 2008 and 2009 excludes tax expenditures and collection of the IETU (bringing it down by about 1 percent of GDP). It does not include estimates of tax expenditures associated with the Maquiladora sector. See Annex for a further breakdown of Mexico’s tax expenditures, including official figures for 2010.

22

See also OECD (2010a; 2010b) for further discussions on tax expenditures in OECD countries.

23

Tax expenditure associated with the special income tax regime for Maquiladoras in 2010 was about 0.11 percent of GDP. This figure only reflects partially the associated fiscal cost, as it excludes the forgone revenue due to the elimination of VAT payments for ‘so-called’ temporary imports of intermediate inputs and other tax expenditures associated with the sector which are difficult to quantify.

24

In absolute terms the richest deciles spend more on consumption, and thus receive a larger share of the associated tax expenditure. But as a proportion of the income of each income group, the incidence of the implicit VAT subsidy is larger for the most vulnerable groups (OECD, 2011). Options for changing the system to broaden the tax base should consider associated measures to compensate these groups (as their purchasing power would be significantly reduced under the elimination of special VAT tax regimes).

25

The lower bound indicates first-round gains obtained through a number of identified measures (elimination of various tax expenditures, introduction of a positive excise on gasoline and improving administration of property taxes); the upper bound represents an indicative benchmark defined to reflect international standards (which in principle could be achieved through the introduction of broader tax measures).

26

This is roughly given by 0.13 percent of GDP due to the reduced rate in border zones; 0.28 percent of GDP due to VAT exemptions; and about 0.87 percent of GDP due to goods and services at zero rate.

27

Keen et al (2009) undertake similar estimations to determine a tentative upper-bound for VAT revenue in Mexico. They also discuss in detail the steps involved to increase the VAT efficiency ratio in Mexico to levels observed in peer countries. Reaching those levels of VAT efficiency over the longer term would involve the elimination of special treatments (for instance of suppliers to the Maquiladora sector) and the correction of various imperfections in the system (including in administration and compliance).

28

For instance, Spain levied about 1 percent of GDP through fuel taxes in 2010.

29

Over the period 1980–2005, Mexico’s fuel excises were on average about 1 percent of GDP.

30

The focus on immovable property taxes here is due to the fact that in most OECD countries they tend to explain a large share of subnational tax collection. In addition, they have efficiency-enhancing characteristics relative to other taxes owing to the immobility of the tax base, which make them appealing from a tax policy perspective. They are thus less distortionary in terms of the allocation of resources in the economy, since they do not tend to affect investment-savings decisions, thereby helping preserve long-run growth. They are also progressive, since property values and income levels are positively correlated with income.

31

Tax expenditures that are not strictly justifiable in terms of efficiency or effectiveness should be eliminated over time, as they tend to generate important costs to society and unnecessary complexities to the tax system.

32

This estimate, however, would have to be adjusted to net out that part of the revenue already collected through the IETU.

Mexico: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.