Tax reform: a decrease for productive investment

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This week will witness the conclusion of voting in the Senate for the approval of the tax reform. With a majority of votes from PRI, the Green Party and a section of PRD, new and controversial fiscal measures that have the purpose of collecting an additional 180 billion pesos to complete, alongside a 4.1% deficit, a 2014 budget thought to be of 4.5 billion pesos.
Like a journey to the past, this rhetoric justifies modifications under the supposition that parts progress and equality within the fiscal regime will benefit the poorest and will tax the richest. Such a discourse turned out to be an effective way for PRI to gain the support of a PRD sector (as a matter of fact, the fiscal initiative is more a PRD project that it is of PRI) with the goal of reaching the vote majority needed. Nevertheless, the new tax obligations are regressive, unsustainable and provide food for thought regarding their true motivations.
In the verge of an imminent economic downturn within the country, the Mexican government will stop perceiving an amount of between 65 and 70 billion, which is approximately 0.4% of its GDP. It is obvious that, while planning this policy, what was urgent prioritized what was substantial. Once again, the nation is far away from an ideal scenario in which the tax reform can go through a strategic and integral path in order to boost sustainable growth. Changes in this regime will shield public finances so the government may exercise spending as a leading variable in order to boost a sort of growth that will be hard to sustain and pay in the future.
For instance, the manufacturing sector, considered as an engine for economic development merely two decades ago, is now facing enormous challenges to enhance its competitiveness. The aforementioned industry’s economic performance, comprising of approximately 6,257 business establishments, 2.3 million direct jobs and 195.756 billion dollars in annual exports, is currently threatened by the proposal of elimination its 16% VAT exemption on imported goods. This model raises costs and establishes incentives for manufacturing companies to consider opening projects in more competitive jurisdictions. Even though these companies might get VAT refunds, this will mean long and costly procedures that will only make them more expensive. Let’s not forget how competitiveness in the sector depends not only of fiscal incentives but also in the existence of necessary conditions (judiciary certainty, energy resources at competitive prices, infrastructure, guarantee of property rights, security) for its development. It is precisely in these areas where Mexico doesn’t stand out and has a need for public policies that might address the issue. Leaving this industry unattended is a strategic mistake. Nowadays, around 3 billion dollars of frozen investments are waiting for the final draft of the tax reform to be issued
In the face of a likely decrease in consumption and exports as well as an uncertain mobility regarding investments, Mexico will have to wait and see how tax collecting and expenditures turn out under new changes such as the main (and dangerous) variable that will push the economic growth forward. In combining with the transformation observed in the energy sector as a consequence of a future Constitutional reform and the issuing of secondary legislation that might implement it, the complete assessment on the impact of this tax law might be integrally analyzed with a clear separation between public finances and oil revenues, as well as the capacity of execution that companies such as PEMEX and CFE might accomplish under independent management. The aforementioned seems like a distant dream: how long will we have to wait to see it become a reality?


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