The International Monetary Fund (IMF) called on countries with low tax collection, “like Mexico,” to review tax rates and the tax base, to strengthen their source of public revenue so that it finances development needs.
Within the Fiscal Monitor, a semi-annual analysis of public finances, they specifically recommended reviewing the advantages that the Value Added Tax and Personal Income Tax would have.
Figures from the Organization for Economic Cooperation and Development (OECD) show that Mexico’s tax revenues were equivalent to 16.9% in 2022, far from the average of the countries in the group, which is 34% of GDP.
In the IMF document, they take the experience of Nigeria and Thailand on increasing VAT rates, and that of Malaysia in reintroducing taxes on goods and services, as well as those of Brazil, Egypt and the Kyrgyz Republic in rationalizing fiscal expenditures or exemptions to note that these measures have helped mobilize income in a more lasting way to finance development needs.
In the presentation of the report, the deputy director of the Public Finance Department of the IMF, Era Dabla Norris, explained that these types of modifications help create the space to replenish the fiscal buffers that were taken to face the health emergency and that they also help guarantee a consistent source of income.
Within the document, launched in the framework of the Annual Meetings of the IMF and the World Bank, they urged to replenish the buffers or cushions that will allow countries to face possible external shocks.
Reference to Mexico
It is in this context that they proposed adjustments in the framework of tax collection, for countries with low collection, such as Mexico. Through a reform, the advantages of the regulation around VAT and ISR could be taken advantage of.
This is not the first time that the IMF has made a recommendation to strengthen the capacity to generate income that taxes such as VAT and ISR have.
Since 2019, it suggested applying a generalized VAT rate of 16% on foods that are exempt. In fact, they estimated, at that time, that the application of this measure on food, plus the collection of VAT from digital service providers, would grant an additional point of GDP to the collection.
Later, in 2020, in the recommendations contained in the review of Article IV for the country, the members of the Board recommended changes in VAT, corporate ISR, Property Tax and in the IEPS formula. Of the latter, they showed that the IEPS on gasoline is deeply regressive and disproportionately benefits those with higher incomes.
They warned that the application of fundamental reforms to VAT, such as generalizing collection, reducing evasion, making it progressive, and removing the zero rate, will contribute “at least 2 additional points of GDP” to collection.
In the aforementioned analysis, from 2020, the IMF technicians stressed that given the political difficulty that it has meant for Mexico to promote a generalization of VAT collection, “it would be prudent” to convince and demonstrate to the population that these resources will strengthen the social security networks that are a priority for the government, which it estimates will cost around half a point of GDP.
Protecting public spending and encouraging growth
During the conference, the deputy director of the Public Finance Department of the IMF explained that by improving collection, the protection of public spending can be guaranteed to ensure that every dollar spent will have an impact.
As the expert explained, making collection more efficient will help strengthen confidence in institutions.
There, the IMF’s director of fiscal affairs, Vitor Gaspar, commented that a reengineering of spending is required to free up resources that can be used to help the most vulnerable, whether they are lower-income households or poorer states.
He suggested strengthening their financial buffers in case of extraordinary income, reducing debts and leaving a fiscal space that allows them to respond to external shocks.
Source: eleconomista
