Category: Fiscal Policy

Tax Revenue Sources

“The central goal of an establishment is to insure that the system works so that the country will in the long run be successful. An establishment is self-confident that if the system works and if their country does well, they will personally do well. Being self-confident they don’t have to make their own immediate self-interest paramount when they influence public decisions.

In contrast an oligarchy is a group of insecure individuals who amass funds in secret Swiss bank accounts. Because they think that they must always look out for their own immediate self-interest, they aren’t interested in taking the time to improve their country’s long-run prospects. They aren’t confident that if the country is successful, they will be successful.” — Thurow, Lester C. (1989), An Establishment or an Oligarchy?, National Tax Journal, 42:4, pp. 405-11

Tax Revenue

Comparing Mexico’s tax revenue statistics with those from Chile, the only other OECD member in Latin America, reveals the regressive nature of the country’s fiscal policy. Consider for instance, that taxes on immovable property (impuesto predial) in Mexico tallied 20 USD/capita in 2017 vs Chile’s 103 USD/capita and that the South American nation has no payroll tax.

Payroll taxes, by definition, do not confer entitlement to social benefits and are used to finance general government expenditure and investment.

In Mexico, payroll taxes (Impuesto Sobre Nómina or ISN) are calculated as a percentage of payroll, rather than being a fixed amount per employee, and are approved and collected by legislative and executive branches at the state level.

In 2006, 35 years after first being introduced in the State of Mexico, the totality of Mexican states had adopted an ISN. By the turn of the century, they were the largest source of revenue for this level of government and state finances have become even more dependent on the ISN after the wrongheaded decision in 2007 to go ahead with reductions in the motor vehicle ownership tax (tenencia).

Motor Vehicles and Taxes

Lore has it, incorrectly so, that the tenencia tax levy on motor vehicle ownership was introduced in Mexico with the goal of financing the 1968 Olympic games and remained on the books for decades.

As of 2018, with car registrations reaching a historical high, a majority of Mexican households (51.3%) did not have a car or truck in their possession.

However, during the administration of President Felipe Calderón, a process was kicked-off whereby the fiscal burden on motor vehicle ownership in Mexico has substantially diminished.

In a country with serious problems of inequality, the demise of the tenencia (which is based on the asset’s value) is a very unfortunate development in fiscal policy. Taxes on motor vehicle ownership are sensible because they are fiscally progressive, efficiently collected and create appropriate incentives regarding decision-making in matters of urban development and environmental sustainability.

2017 Tax Revenue from Property

“Because we are talking about directly taking money away from people or putting money in people’s pockets, taxation is a place where we can most clearly see whether we have an establishment or an oligarchy.” – Thurow, Lester C. (1989), An Establishment or an Oligarchy?, National Tax Journal, 42:4, pp. 405-11

2018 Revenue from Impuesto Predial

Real property is very lightly and disparately taxed in Mexico.

Across the US, state and local governments collected a total of 526 billion USD in property taxes during 2017. This amount comes out to be 1,618 USD/capita and 2.7% relative to GDP.

In Mexico, property tax (impuesto predial) collected in 2018 totaled 49 billion MXN (~2.6 billion USD). The figure is equivalent to 394 MXN/capita (~21 USD/capita) and 0.2% relative to GDP.