jueves, 24 de octubre de 2013

The bloom is off the rose: not a fiscal reform dear to businesspeople

The income law passed at the end of last week by Mexico's Chamber of Deputies soured the business community's perceptions of the Peña Administration. Instead of a fiscal reform, the feeling is that the country got another "miscelanea fiscal", an assortment of measures designed to increase the government's tax take by going back to the same taxpayers as always.

There's a real concern that the new tax law will encourage, not discourage, the informal economy. Certainly the elimination of the IETU and the IDE control taxes (the former is effectively an alternative minimum tax and the latter, a tax on cash deposits over a certain monthly amount) takes away two important "sticks" in Hacienda's efforts to ensure, respectively, that all firms pay taxes and to rein in the informal economy. Time will tell whether the incentives the new law contains are sufficient to entice businesses operating informally to become formal. Unless we can see individual companies' tax returns, we'll never know if the elimination of the IETU redistributes the tax burden amongst companies or if those firms that have been paying IETU pay as much or more in income taxes going forward.

Even with an additional 1.0% of GDP in additional revenue next year, the "deficit creep" Mexico has experienced will accelerate sharply in 2014. The expanded social programs that are part of the 2014 budget raise the specter of new life being infused into the patron-client politics at which the "old PRI" excelled.

Meanwhile, it looks like the Administration is betting on public sector spending and exports to propel growth next year. The bet that the passage of President Peña's reform agenda would spur physical investment by private sector is not likely to pay off in 2014, unless it's investments in the energy sector. Portfolio investment is another story, of course: those flows will hinge on the Fed's tapering policy.

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