New Year, New Taxes in Mexico

Mexico rang in the New Year with a series of tax hikes in hopes of easing a budget deficit sparked by last year's financial crisis. On Monday, tax increases went into effect on income, consumer goods, and phone service, along with an rise in fuel prices. The country’s tax revenues in terms of GDP rank among the lowest in the world. Still, the hikes could lead to inflation and dampen the country’s 2010 growth rate. The tax increases come as President Felipe Calderón kicks off the second half of his term with an ambitious political reform proposal.

The sales tax increased by a percentage point to 16 percent, income taxes rose from 28 to 30 percent, and a 3 percent tax on telecommunications services kicked in. A tax on cash deposits above $1,153 rose from 2 to 3 percent as well. Moreover, businesses face limits on postponements of back taxes. The Calderón administration says the tax increases could bring in nearly $10.5 billion this year, which could help address a $23 billion budget deficit sparked by a decrease in tax collections coupled with Mexico’s declining oil production. The ailing U.S. economy has packed a punch, and remittances sent home by U.S.-based Mexican emigrants declined by 14 percent in a year-on-year comparison, reports the Financial Times.

The taxes, folded into austerity measures approved in November, have won little favor. Calderón, whose time in office has been marked by a tough stance on drug cartels, experienced solid approval ratings during the first half of his term. But a Reforma poll published last month showed his support rate dropped by 16 percent over the prior quarter. The tax increase ranked as the highest reason for disapproval. A December report by Mexico’s Central Bank suggests the hikes could cause inflation rates of 5.25 percent and limit GDP growth to 3 percent next year. The price of tortillas, a staple food in Mexico, rose 4 percent last week, reports Bloomberg.

Manlio Fabio Beltrones, leader of the opposition Institutional Revolutionary Party (PRI) in Mexico’s Senate, warned that the Calderón government must stem rising costs or face obstacles to a proposed political reform. Calderón’s 10-point plan includes measure such as reducing the number of senators and deputies, allowing independent candidates to run, and holding runoff elections if no presidential candidate wins a majority.

In efforts to speed financial recovery, other countries in Latin America are raising taxes. In an AQ blog post, Daniel Altschuler examines tax increases in Central America, particularly an upcoming tax reform fight in Guatemala. Argentina’s single tax system went into effect Monday, with taxpayers increasing their share of contributions for retirement and health programs.

Learn more:

• 2010 Budget data regarding Mexican tax system.
• Calderón’s 10-point political reform proposal.
• Bank of Mexico December 2010 inflation report.