Changes to the Social Security Act: the beginning of an alternative fiscal strategy?

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On March 19th, PRI Deputy Sergio Torres presented an initiative to reform article 27 and repeal article 32 of the Social Security Act (LSS). The proposal seeks to modify the calculation formula for the employer-employees fees that are reported to the Mexican Social Security Institute (IMSS), which currently consists on the employee’s gross base salary. It also looks forward to the standardization with the existing legislation on Income Tax (ISR) collection. Ernst & Young estimates that such a measure would represent an increase of between 3 and 20% on costs for companies, depending on its payroll size as well as their benefits packages. On the other hand, Baker & McKenzie warned that this action would affect employees the most; some employers have even threatened with passing the overall cost increase on workers in the next wage negotiation period.

Proponents of the bill argue that it does not represent a new “punishment” against captive contributors in order to increase tax collection, but it seeks to avoid double standards between IMSS and ISR revenue collection systems. The reform would eliminate the current system, in which companies report low quotas to Social Security, while reporting large quotas to SAT with the purpose obtaining ISR payment exemptions.

Now, additional tax collection might not be enough to mitigate the IMSS financial crisis. According to the Mexican Employer’s Confederation (COPARMEX), the reform would constitute a tax collection increase of between 5 and 8 billion pesos annually. IMSS liabilities are 122 billion pesos (9.9% of Mexico’s GDP).

What is the LSS reform looking forward to? As implied by other fronts, those amendments are immersed in a fiscal miscellaneous resolution which might be an alternative to a most significant reform. As illustrated with the case of Nuevo León, a highly productive state, the 50% increase on payroll tax and charges on ownership of trucks and pick-up vans is expected to generate up to 3 billion pesos annually. Another significant sign is the current ISR 30% rate extension which lasts until 2014 and should’ve decreased to 29% in 2013. These measurements are slowly adding percentage points to the country’s tax collection as related to its GDP without undertaking a larger federal reform of a higher structural (positive) and media (negative) impact. For instance, political costs of enforcing Aggregate Value Tax (IVA) on food and medicine, or a 19% IVA rate, as suggested by OECD General Secretary, José Ángel Gurría, are still considered a potential risk.

It is possible that a fiscal miscellaneous resolution might increase tax recollection with a few percentage points and as a result government expenses will stimulate higher economic growth. However, costs of postponing an integral tax reform which deals with delicate matters such as increasing consumer contributions, perhaps the most efficient answer regarding the informal job sector and which has less distortive effects on investment decisions and working force compensations, are growing by the day. PEMEX is a similar case: a reform that would provide the company with a tax regime that will allow its decision-making regarding investments to generate more dividends for the government; this can only be possible with alternative fiscal income. The goal to raise economic growth rate lies within a tax reform that will make paying taxes an easier task, will encourage decision-making not to be guided by fiscal considerations and will collect enough money for the government to fulfill its most elemental duties. In an administration whose main pretension is social expenditure – throughout its flagship program National Crusade Against Hunger and other social aid programs – President Pena´s government cannot continue to avoid taking difficult decisions, especially as the PRI project expects to transcend its leader and strive for post-sexennial continuity.

CIDAC

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