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Mexico: An Evaluation of the Main Features of the Tax System

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Abstract

Mexico's tax system is a paradox. The tax policy and tax administration reforms of the late 1980s and early 1990s delivered a tax structure that is in many ways comparable, if not superior, to that in many OECD countries. However, Mexico's tax system continues to perform in some fundamental ways, in particular in its ability to raise adequate revenues, worse than the tax system of many developing countries. The basic objective of this evaluation is to try to explain this paradox. In doing that we will compare the revenue performance of Mexico's tax system to that of other developing and developed countries and examine Mexico's tax system buoyancy and elasticity over time. The evaluation will also take stock of the recent performance of Mexico's tax system vis-a-vis other important objectives of any tax system. In particular, we will examine the vertical and horizontal distribution of tax burdens, the relative distortions or excess burdens introduced by the tax system in the decisions of economic agents, and its relative complexity and impact on tax administration and taxpayer compliance costs. The main objective of the evaluation is to identify the most important avenues for reform in tax policy, tax administration, and the political economy of tax reform in Mexico.The improvements in Mexico's tax structure have been many during the last 10 to 15 years. Examples in the area of income taxation include the practically full indexation of personal and enterprise profit tax for inflation, the full integration of these two taxes to avoid the double taxation of dividends, and the application of a minimum tax on gross assets, to which the enterprise profit tax is creditable, to combat tax evasion. The structures of the VAT and excise taxes are also on the whole quite adequate. While many nuisance taxes were eliminated, the standard tax rates for the main taxes are similar to or slightly below international averages. The effective marginal rates of taxation on new investment, as also reviewed below, have been found to be below those of most OECD and Latin American countries, thus creating a favorable atmosphere for domestic and foreign investment. And yet, with all these good characteristics, Mexico's tax system has not been able to generate much more that 10 to 11 percent of tax revenues in relation to GDP. The most important issue before proceeding with tax reform, especially if the most important objective is to increase the revenue adequacy of the system, is to explain what factors may account for this enduring low tax effort.

Suggested Citation

  • Jorge Martinez-Vazquez, 2001. "Mexico: An Evaluation of the Main Features of the Tax System," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0112, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper0112
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    1. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
    2. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters,in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
    3. Thomas Dalsgaard, 2000. "The Tax System in Mexico: A Need for Strengthening the Revenue-Raising Capacity," OECD Economics Department Working Papers 233, OECD Publishing.
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    Cited by:

    1. Richard Bird & Jorge Martinez-Vazquez & Benno Torgler, 2007. "Tax Effort: The Impact of Corruption, Voice and Accountability," School of Economics and Finance Discussion Papers and Working Papers Series 223, School of Economics and Finance, Queensland University of Technology.
    2. Richard M. Bird, 2014. "Foreign advice and tax policy in developing countries," Chapters,in: Taxation and Development: The Weakest Link?, chapter 4, pages 103-144 Edward Elgar Publishing.
    3. Richard M. bird, 2003. "Taxation in Latin America: Reflections on Sustainability and the Balance between Equity and Efficiency," International Tax Program Papers 0306, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
    4. Jean-François Brun & Maïmouna Diakite, 2016. "Tax Potential and Tax Effort: An Empirical Estimation for Non-resource Tax Revenue and VAT’s Revenue," Working Papers halshs-01332053, HAL.
    5. Richard M. Bird & Jorge Martinez-Vazquez & Benno Torgler, 2014. "Societal Institutions and Tax Effort in Developing Countries," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 301-351, May.
    6. James Alm & Jorge Martinez-Vazquez, 2007. "Tax Morale and Tax Evasion in Latin America," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0704, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    7. Jaime Acosta-Margain, 2011. "Tax-benefit incidence of value added tax on food and medicine to fund progressive social expenditure," Working Papers 194, ECINEQ, Society for the Study of Economic Inequality.
    8. Torgler, Benno, 2011. "Tax morale and compliance : review of evidence and case studies for Europe," Policy Research Working Paper Series 5922, The World Bank.
    9. Richard M. Bird, 2008. "Tax Challenges Facing Developing Countries," Working Papers id:1618, eSocialSciences.
    10. Alex Cobham (QEH), "undated". "Tax Evasion, Tax Avoidance and Development Finance," QEH Working Papers qehwps129, Queen Elizabeth House, University of Oxford.
    11. James Alm & Jorge Martinez-Vazquez, 2007. "Tax Morale and Tax Evasion in Latin American Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0732, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    12. Richard M. Bird, 2003. "Managing the Reform Process," International Tax Program Papers 0301, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised May 2003.
    13. Benno Torgler, 2005. "Tax morale in Latin America," Public Choice, Springer, vol. 122(1), pages 133-157, January.
    14. Torgler, Benno, 2011. "Tax morale, eastern Europe and European enlargement," Policy Research Working Paper Series 5911, The World Bank.
    15. Georgia Kaplanoglou & Vassilis T. Rapanos, 2011. "The Greek Fiscal Crisis and the Role of Fiscal Governance," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 48, Hellenic Observatory, LSE.
    16. Brima Ibrahim Baimba Kargbo & Adegbemi Festus O. Egwaikhide, 2012. "Tax Elasticity in Sierra Leone: A Time Series Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 432-447.

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    Mexico Tax System;

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