Saturday, July 27, 2013

pass the tax plate

My admiration for President Enrique Peña Nieto continues to grow.  Not necessarily for his policies, but for his ability to work the levers of politics. 

Last March I wrote about the dramatic policy tack the Institutional Revolution Party (PRI) had taken concerning the taxation of food and medicine in Mexico.  (peeling the people

Food and medicine have long been exempt from Mexico's value added tax -- a hidden sales tax quite common in most western countries these days.  When its rival, the National Action Party (PAN) proposed removing the exemption, PRI leaders waved the bloody shirt and disinterred the corpses of Emiliano Zapata, Pancho Villa, and
Lázaro Cárdenas.  Betrayal of the revolution painted the breeze.

PRI's argument back then was PAN had no concern for the poor because the poor would end up paying a disproportionate amount of their income as the result of a sales tax increase.  So, the proposal died.

And then along came Peña Nieto who won the presidency for PRI on a platform that was indistinguishable economically from PAN's failed policy proposals over the past twelve years.  Increasing the sales tax on food and medicine was not part of PRI's platform during the election.  Not even the barons of PRI were quite that craven.

PRI waited until after the election to change its platform in Peña Nieto's ongoing Blairification of PRI.  In just another step of turning what once masqueraded as a revolutionary party into a liberal democrat party.  A political niche that has long gone unfilled since the death of Benito Juárez.

That was merely step number one is softening up public opinion on the sales tax increase.  The second step began this week.  With the release of additional tax increase proposals and clarifications.

The major clarification is that certain foodstuffs will not be taxed.  Milk.  Eggs.  Beans.  Tortillas.  In The States, that would be the equivalent of Mom, flag, and apple pie.

But, even after spending all the political capital to change VAT, the increase in revenue will be only 1% of GDP.  PRI wants an increase of 6%.

To earn back some of his populist aura,
Peña Nieto has leaked two potential tax rate increases.  The first is the capital gains tax rate.  The second is the top income tax rate.  37 percent has been floated.

Unfortunately, whatever revenue is gained through the sales tax increase will most likely be lost when the capital gains and income tax rates are increased.  A large portion of Mexico's astounding economic growth has come from foreign investment.  That capital can easily find a home somewhere else with better tax rates.

And Mexicans can just as easily move their investments where the rates are not as onerous.  The result, of course, will be higher rates and lower revenues.

It will be ironic if the president goes to the effort to hammer together a PRI-PAN coalition in Congress only to discover that the state's take has not increased. 

As for me, if Adam Smith is correct, my diet will soon become far more local.

Milk.  Eggs.  Beans.  Tortillas.  And I may be the better for it.

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