On September 8th, President Peña gave a speech at the official residence of Los Pinos, where he delivered the 2014 Economic Package. Within the framework of this Constitutional duty, the federal government presented a so-called “social and tax reform”. It is not a coincidence that both issues have been matched, not only due to the natural linking between tax collecting and public expenditure but, also given the way in which the current administration has exercised a “carrot and stick” policy with the purpose of maximizing the sale strategy of its initiatives. Nevertheless, the tax reform was the one that could cause the most discomfort on the general population. How have the federal authorities handled the political scenario in the face of one of its most important reforms?
The ghost of VAT in food and medical supplies as well as the increase of the aforementioned tax so it could match OECD levels (21% rate) ended up fading away. This vanished one of the left wing’s main battle cries. In fact, the appearance of Jesús Zambrano in the official residence strengthened the image of the Pact for Mexico’s validity, as well as ratifying PRD leadership’s accordance with several tax and social security proposals made by the current administration. On September 11th, during Luis Videgaray’s (Secretary of Public Finance) appearance at the Senate, PRD Deputies bragged about the repetition of social programs applied on Mexico City in several tax and social security proposals in the federal government’s plan; for instance, giving Constitutional status to universal pension for the elderly. On the other hand, and surely thinking about an important sector of their new political, middle-class clients, a part of the left wing has spoken against taxing school fees and pet food. It would seem obvious that the latter, along with similar taxes, were included in the initiative as to be removed in the law that is actually approved, thereby giving legislators a few small and marginal triumphs.
Regarding those movements that are closer to Andrés Manuel López Obrador, Deputy Ricardo Monreal (member of the Civic Movement party) claimed that the lack of VAT in food and medical supplies was due to Obrador’s pressure. It’s clear that the leader of MORENA (National Regeneration Movement) has a full catalogue of issues to be protesting about so he will continue mobilizing his followers, but that’s another story.
In the case of PAN, complaints have been more intense, especially those in line with the business sector and with the guideline of budgetary balance. Both Gustavo Madero, the party’s national leader, as well as Ernesto Cordero – who could be the main counterweight in the coming weeks for both the initiatives of the federal government as well as his own party’s – have criticized the debt financing included in Peña’s social proposals. They also oppose broadening taxes of mortgage and automobile credits, given the fact that they consider it to be some sort of double-taxing revenues made on the stock market. Regarding the latter, not only those who are directly involved in the stock market would be affected but also anyone who might have retirement funds such as AFORE. In a scenario of limited resources after losing the Presidency, the “carrot” for PAN could consist on the money provided for political parties, as well as the federal income of those states that they still govern.
The previous leads us to review some other relevant acts on fiscal matters: state governments. The President promised to provide an additional 1% of GDP for local administrations. The glee shown by Governors when hearing about this new regulation comes along with a paradoxical joy. The Federal Government will continue to be the main collector and administrator of public resources (with Deputies supporting the Expenditure Budget). Governors will keep on lobbying at the Secretariat of Finance, Ministry of the Interior as well as the Senate in order to secure budgetary reallocations. Thereby, once again, building a true fiscal federalism where entities not only assume the responsibility of collecting more, but also the federal participation exercised on states and municipalities can be audited with greater transparency, remains a pending task.
Lastly, even though it has the required majority to approve the Economic Package in the Chamber of Deputies (which has the exclusive power to discuss and vote the Expenditure Budget) PRI needs support from PRD and/or PAN if it wants to pass the Revenue Act in both Chambers, that is to say, where taxes are included. Nevertheless, including controversial issues such as the Presidential proposal of taxing VAT to school fees and ending the consolidated tax regime will prove to be a “bargaining chip” in order to pass the bulk of the reform. Taxing private education will surely be rejected, particularly after statements made by Manlio Fabio Beltrones, the PRI leader at the Chamber of Deputies. Regarding the consolidated tax regime, the draft does not explicitly state “ending” it, but it does talk about “analyzing” its restructuration and, if necessary, vanishing it.
Given the situation, the tax reform shows a wide range of political strategies with the purpose of heading towards it may be needed, convincing those who need to be convinced and, in the end, getting away with it, institutionally speaking. The pivotal point is that the government has planned this reform more like a political instrument rather than a financial one, which begs the question if it may reach the economic goals it proposes. There is no doubt that the government is effectively changing the paradigm that has dominated economic policy decisions since the 1994 crisis.
CIDAC
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