Pernicious Solutions

Luis Rubio

When the government of a country finds itself in financial trouble it has two possible solutions: it can reduce its excessive expenditures, or it can transfer the problem to the citizenry. The first course incentivizes growth because it ceases diverting resources to socially unprofitable projects, while the latter route undermines future growth in that it diverts existing savings toward unproductive ventures. A responsible government would procure causing the least damage to the society and the economy. An irresponsible or unenlightened government could think of nothing other than raising taxes.

When a family suddenly finds itself unable to meet its expenses or is deeply in debt, it has no alternative than reducing its consumption. A government is not the same as a family (because it can go into debt), but politicians never have the wish to grasp this basic logic, believing as they do that there is no limit to what they can squeeze out of the population via taxes. What they generally do not recognize is that their actions have consequences. Many unproductive expenditures, as well as various types of taxes, have the pernicious effect of hindering prosperity. Still much worse when the economy is in recession, savers are unwilling to divert their resources, and investors do not trust the government.

The notion of carrying out a “fiscal reform” is as old as the country. All politicians dream of finding novel tax-collection sources that allow them to spend more without their having to be accountable to anyone. That is why they love entities such as PEMEX, which they view as a cash cow that they can milk without limit and because the subsoil, in contrast with the citizens, does not complain. The problem is that years of overexploiting the oil and vast corruption have created a white elephant which is not only broke (in fact, it has negative capital), but one whose financial situation is not even being addressed. Under these conditions, all the money in the world cannot solve the problem: instead of PEMEX transferring resources to the Treasury, as always, it now consumes them. The greatest virtue of the reform of the oil sector that the previous administration carried out was that it was focused on a gradual stabilization of PEMEX without sacrificing investment and production in the sector. This is what the López Obrador administration destroyed, without understanding the nature of the problem or its costs.

Governments and the politicians who run them only like a fiscal reform when it is on the revenue side; they are disturbed when the other side of the coin comes up: the expenditure, always untouchable except when the president wishes to move monies from items he does not like to those for his favorite clienteles. Same when, under an electoral rationale and the logic of controlling the citizenry, they attempt to strip the tax-deductibility of donations to civil organizations. Fiscal matters in Mexico are managed as if they were the personal fiefdom of the president.

For a fiscal reform to be successful, legislators would have to recognize that anything they do entails consequences, many of these damaging.  Raising taxes –whether through a rate increase or inventing new forms of tax collection- implies draining the society’s resource to commit them to projects that often will not only not contribute to a greater development, but that will lead to greater impoverishment. There is no better example of waste than the new Dos Bocas Refinery, a project that will probably never enter operation, above all because by the time it is built, gasoline consumption will have begun to decline.

On the other hand, there are areas where higher tax collection possesses not only a logic, but also one in which this comprises a social and political imperative. The country requires a new tax base for its long-term development, a platform that would derive from the elemental principle that it is necessary to correct many of the dysfunctional structures and that these require financing.  The most evident example is that of security, a scourge that little by little destroys the essence of being Mexican, condemning the country to its gradual wrack and ruin. At present, the country devotes many resources to security at the federal level, but not at the local one, for which property taxes are the appropriate type.

The only security worth its salt is that which works from the bottom up because it is security that looks after the citizen. Federal resources -money, police, and the Army- are crucial for the development and consolidation of municipal capacity, but they fulfill their purpose only if these are considered as mechanisms for the development of security starting from the bottom. Those capacities cost money and should be financed, therefore the assurance must exist that the property tax rises to the level corresponding to this need and that it is collected effectively, in addition to its being employed for that purpose. This is solely one case in point of the sizeable levying of taxes oriented not toward satisfying presidential whims, but instead toward citizen necessities.

There is a fundamental economic tenet that the greater the tax the lesser the product. Congress can promote all the reforms it wants to, but if these end up being confiscatory, they will kill the machine that produces growth and with it, its taxable sources.