"get ready for six more years of mediocre growth"
Refried Bean Counters
By MARY ANASTASIA O'GRADY
July 2, 2007
Americans who travel to Mexico are warned not to drink the water. Too bad Mexicans who spend time in Washington at the International Monetary Fund don't get similar advice about the ideological Kool-Aid served there. It might keep them from ingesting bad attitudes about taxes and growth and transporting them back home.
Such musings are hard to resist when pondering the fiscal reform recently proposed by President Felipe Calderón's Minister of Hacienda (Treasury), Agustin Carstens. Mr. Carstens is an extremely able Chicago-trained economist and a renowned negotiator in Mexican politics. Unfortunately, he also spent three years (2003-2006) at the IMF and if this reform -- long on creative ways to make businesses pay more taxes and short on pro-growth incentives -- is any guide, he has more than sipped from its fountain of economic "wisdom."
Let's concede that there is a fundamental divide in development economics today between those who believe that a simple, low, flat tax is the best way to promote prosperity and those who think governments can and should engineer fairness through a progressive tax code. The former view focuses on growth, the latter view -- championed by the IMF -- on socializing the fruits of the productive sector of the economy.
A dozen or so countries have chosen the flat tax with stunning economic success. Ireland, once poor and backward, adopted a flat corporate rate and became the Celtic Tiger. Russia triumphed over a seemingly irreversible culture of tax evasion with a single, low corporate rate and has experienced a sharp increase in revenues. Many Eastern European countries, impoverished by decades of communism, have gone one step further to adopt a true flat tax which covers individuals.
But IMF theology still holds most Latin American policy makers in thrall. It preaches that fiscal balance is sacred and if politicians won't cut spending, then they should raise taxes. The productive sector of the economy -- which includes anyone with money -- must cough up the revenue that bureaucrats and politicians need. Perhaps the most damaging aspect of this dogma is its rejection of "dynamic scoring," or in layman's terms, the positive effects on revenues when simplicity and low rates produce higher levels of economic activity, compliance and investment. In clinging to a static analysis, policy makers are forever forced to go after the private sector with increasing zeal. This frightens capital and is no way to promote growth. Regrettably, Mexico's young Calderón government looks like it is about to fall into this trap.
The proposed reform, which will be debated in Congress this summer, includes policy changes in the areas of federalism and public spending. But it is the tax component that is especially troubling. What is toted as a "single corporate rate," will be, in effect, an alternative minimum tax on consumption administered alongside the old corporate income tax.
The Mexican tax system, like the U.S. tax code, is a mess -- complex and unjust and burdensome to comply with. Rates were brought down during the government of Vicente Fox, who was president from 2000-2006, but the code is rife with loopholes and there are high levels of evasion. In a November report, the Economist Intelligence Unit described the system as "convoluted" and said that "large companies regularly complain that they are disproportionately burdened by the tax system because the authorities find it easier to track their activities than those of smaller firms." The report also noted that the "informal sector, which skirts all tax obligations, is massive and grows larger every year."
Mexico says that it collects taxes equivalent to only about 12% of gross domestic product and that with oil revenues dropping in future years, it will need to get more money from the private sector to avoid fiscal imbalances. It is this thinking that has produced the proposal for a new "single rate" AMT, a young Frankenstein to walk alongside the current monster tax system.
Here's how it works: Businesses calculate their taxes under the old system, with its top marginal rate of 28% and the slew of deductions and exemptions that apply under the current tax law. They then calculate their taxes under the "single rate," which is 19% on revenues minus inputs and capital expenses. Labor is not deductible but there is a credit earned for low-wage labor. The tax paid is the higher of the two.
The idea here is that through the subsidizing of low-wage labor, more low-paying jobs will materialize. Meanwhile, businesses won't be able to use an army of accountants to take advantage of exemptions and whittle tax payments down to nothing. They are now going to be hit with a 19% AMT. For those companies, this is a tax increase and the government hopes revenues will rise.
On one level it is hard not to cheer on Mr. Carstens. Closing the loopholes is a noble goal, and there is no doubt that had he tried to eliminate them through a rewrite of the code, Mexico's powerful special interests would have crushed the attempt. To give the minister his due, his is an effort to get around that problem, and there are those who would argue that, given Mexican politics, this is best that can be accomplished at this time.
Yet it is worth asking whether this is what Mexicans are being offered because the IMF's view of the world now prevails inside Hacienda. Though the reform does away with the 2% asset tax, it does nothing to simplify the code so as to encourage compliance. Instead it adds the AMT consumption-tax calculation, further complicating the filing process. There is no rate cut, which is key to both broadening the base and attracting investment to boost growth. It is also biased against skilled labor, which ends up being taxed twice. There will be plenty of jobs for basket weavers in Chiapas but companies that use skilled labor will now have an incentive to replace people with machines, which they can write off. And since businesses often react to tax increases by voting with their feet or making other adjustments, there is a distinct possibility that the tax increase won't even generate the revenue promised.
The bean counters at the IMF are going to love this reform, but coming from a president that promised to unleash the animal spirits of an entrepreneurial nation, it is a colossal disappointment. If this is the best that the self-proclaimed jobs president can do in the early years of his tenure, get ready for six more years of mediocre growth.
Such musings are hard to resist when pondering the fiscal reform recently proposed by President Felipe Calderón's Minister of Hacienda (Treasury), Agustin Carstens. Mr. Carstens is an extremely able Chicago-trained economist and a renowned negotiator in Mexican politics. Unfortunately, he also spent three years (2003-2006) at the IMF and if this reform -- long on creative ways to make businesses pay more taxes and short on pro-growth incentives -- is any guide, he has more than sipped from its fountain of economic "wisdom."
Let's concede that there is a fundamental divide in development economics today between those who believe that a simple, low, flat tax is the best way to promote prosperity and those who think governments can and should engineer fairness through a progressive tax code. The former view focuses on growth, the latter view -- championed by the IMF -- on socializing the fruits of the productive sector of the economy.
A dozen or so countries have chosen the flat tax with stunning economic success. Ireland, once poor and backward, adopted a flat corporate rate and became the Celtic Tiger. Russia triumphed over a seemingly irreversible culture of tax evasion with a single, low corporate rate and has experienced a sharp increase in revenues. Many Eastern European countries, impoverished by decades of communism, have gone one step further to adopt a true flat tax which covers individuals.
But IMF theology still holds most Latin American policy makers in thrall. It preaches that fiscal balance is sacred and if politicians won't cut spending, then they should raise taxes. The productive sector of the economy -- which includes anyone with money -- must cough up the revenue that bureaucrats and politicians need. Perhaps the most damaging aspect of this dogma is its rejection of "dynamic scoring," or in layman's terms, the positive effects on revenues when simplicity and low rates produce higher levels of economic activity, compliance and investment. In clinging to a static analysis, policy makers are forever forced to go after the private sector with increasing zeal. This frightens capital and is no way to promote growth. Regrettably, Mexico's young Calderón government looks like it is about to fall into this trap.
The proposed reform, which will be debated in Congress this summer, includes policy changes in the areas of federalism and public spending. But it is the tax component that is especially troubling. What is toted as a "single corporate rate," will be, in effect, an alternative minimum tax on consumption administered alongside the old corporate income tax.
The Mexican tax system, like the U.S. tax code, is a mess -- complex and unjust and burdensome to comply with. Rates were brought down during the government of Vicente Fox, who was president from 2000-2006, but the code is rife with loopholes and there are high levels of evasion. In a November report, the Economist Intelligence Unit described the system as "convoluted" and said that "large companies regularly complain that they are disproportionately burdened by the tax system because the authorities find it easier to track their activities than those of smaller firms." The report also noted that the "informal sector, which skirts all tax obligations, is massive and grows larger every year."
Mexico says that it collects taxes equivalent to only about 12% of gross domestic product and that with oil revenues dropping in future years, it will need to get more money from the private sector to avoid fiscal imbalances. It is this thinking that has produced the proposal for a new "single rate" AMT, a young Frankenstein to walk alongside the current monster tax system.
Here's how it works: Businesses calculate their taxes under the old system, with its top marginal rate of 28% and the slew of deductions and exemptions that apply under the current tax law. They then calculate their taxes under the "single rate," which is 19% on revenues minus inputs and capital expenses. Labor is not deductible but there is a credit earned for low-wage labor. The tax paid is the higher of the two.
The idea here is that through the subsidizing of low-wage labor, more low-paying jobs will materialize. Meanwhile, businesses won't be able to use an army of accountants to take advantage of exemptions and whittle tax payments down to nothing. They are now going to be hit with a 19% AMT. For those companies, this is a tax increase and the government hopes revenues will rise.
On one level it is hard not to cheer on Mr. Carstens. Closing the loopholes is a noble goal, and there is no doubt that had he tried to eliminate them through a rewrite of the code, Mexico's powerful special interests would have crushed the attempt. To give the minister his due, his is an effort to get around that problem, and there are those who would argue that, given Mexican politics, this is best that can be accomplished at this time.
Yet it is worth asking whether this is what Mexicans are being offered because the IMF's view of the world now prevails inside Hacienda. Though the reform does away with the 2% asset tax, it does nothing to simplify the code so as to encourage compliance. Instead it adds the AMT consumption-tax calculation, further complicating the filing process. There is no rate cut, which is key to both broadening the base and attracting investment to boost growth. It is also biased against skilled labor, which ends up being taxed twice. There will be plenty of jobs for basket weavers in Chiapas but companies that use skilled labor will now have an incentive to replace people with machines, which they can write off. And since businesses often react to tax increases by voting with their feet or making other adjustments, there is a distinct possibility that the tax increase won't even generate the revenue promised.
The bean counters at the IMF are going to love this reform, but coming from a president that promised to unleash the animal spirits of an entrepreneurial nation, it is a colossal disappointment. If this is the best that the self-proclaimed jobs president can do in the early years of his tenure, get ready for six more years of mediocre growth.
1 comment:
Que gueva cuando alguien comienza un articulo calificando de "ideologia" y "dogma" a todo lo que no le gusta.
En temas de development, especialmente si se involucra la interaccion dinamica de instituciones y politica, es casi imposible saber que es lo debe hacer.
Mas que dogmatico, creo que el IMF defiende los intereses de una constituency diferente a la que dicen los documentos, o simplemente es impotente porque la teoria economica no ha avanzado lo suficiente.
Nunca he leido el WSJ en mi vida pero si este articulo es representativo de lo que se escribe ahi, creo que nunca lo voy a leer.
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