What Paradigm?

Luis Rubio

When politicians start making radical adjustments to the fiscal system they run the risk of provoking distortions they could never have imagined. The government presented its fiscal bill, including both incomes as well as expenditures, proposing a “paradigm shift”. This is my reading:

- The objective is commendable. The construction of a social security system would contribute determinedly to curtailing inequality and poverty. However, the content of the initiative is rather weak in relation to a tie-in between objectives and means. The expectation of a 1.4% increase in tax collecting (as a percentage of GDP) is inordinately low and makes it difficult to imagine that such ambitious objectives as have been outlined could be financed. On the other hand, except for a potential increase in consumption (in some lustra), the product of the theoretical diminution of poverty, how the proposed driving of economic growth would be implemented is not obvious.

- In effect, there is indeed a paradigm shift, but very distinct from what the Executive branch made public: this is about a reform that reorients, in concept and focus, the activity of the government with regard to social security and unemployment insurance. But the essence of the new paradigm lies in the re-centralization of spending and its rapid growth, all of it financed with debt and/or, eventually, more taxes. No two ways about it.

- The philosophical lifeblood of the proposal resides in a series of international juxtaposings that compare apples and oranges. The European nations doubtlessly collect many times more taxes, but those nations are not the ones that grow at high speed. The relevant European comparisons would be Poland, Ireland and other like nations, whose tax rates are lower and whose tax collection is higher. In our case, more income to finance poor spending is not exactly an attractive formula for anyone. The example of Brazil does not inspire: this is a country that collects and spends much more but that does not evince a better economic performance: in fact, its performance is much worse.

- It’s nearly axiomatic that when a government speaks of a paradigm shift it is also inevitably speaking of more expenditure, thus higher taxes. Under this heading, the governmental proposal is anything but newsworthy and is unfurling no paradigm shift. It’s more like a return to the past. In fact, the proposal looks very much like the one of 1971 when, in the context of stability, all fiscal balances were broken.

- The governmental proposal rests on three pillars: higher taxes for captive taxpayers, with a surcharge for the emerging middle classes. There’s nothing new in requisitioning greater contributions from businesses and individuals, but the contempt for employers is perceptible, as if assuming that these have no investment alternatives. The second source of financing is more audacious and more interesting: the reduction or elimination of certain special tributary and tax-exemption regimes. And the third, a bigger deficit.

- The numbers don’t lie: we Mexicans pay fewer taxes with respect to the GDP than other nations, but because of a defective tax collecting system and not due to the tax rates. What’s significant is that the government is not even arguing that higher taxes lead to higher economic growth rates. The government implicitly accepts what everyone knows: the population acts as if it’s paying and the government acts as if it’s governing. This is the paradigm that must be shifted because when a better performance of the economy, of education, of the energy entities or of the states, is achieved, no Mexican could be opposed to contributing his corresponding share. This is an issue of citizenship.

- Despite the attractive rhetoric that accompanies the proposal of the reform, with the sole exception of the potential simplification of procedures to comply with tax obligations, there’s nothing in the initiative that contributes to driving greater economic growth. Similarly, although incentives are proposed for promoting the incorporation of informal enterprises into the formal regime are theoretically sound, it is not obvious how they would work in practice. In addition, the tax on cash deposits in banks that was meant to create a negative incentive for the informal economy is eliminated.

- The most important of the initiative’s variables lies in the governmental concern with the null (or negative) growth of productivity during the last decade. The problem of the focus employed is that the averages obscure more than they illumine: there are sectors that experience spectacular productivity growth rates, while others fall behind and contribute negatively. The two great contributors to negative productivity are the State companies, above all Pemex and CFE, and the informal economy. It’s clear that the government trusts that the energy reform would contribute to reducing the sector’s unproductivity, but there’s nothing that enables being optimistic about the informal economy, a complex phenomenon not easy to untangle.

- Instead of the transcendental fiscal reform that the government promised, what the executive has proposed is a clean-up of the tax system (that is to say, not another series of tiny changes and additions on top of endless previous such feats, but a new law that eliminates contradictions and duplicity), but not a new vision of development: only more government without mechanisms that make it accountable. No change at all is proposed on the expenditures side, except to increase them, which is worrisome because part of the absence of legitimacy that our governmental system enjoys has to do with the waste and corruption characterizing public spending. The example of education is evident: Mexico is at the top in the percentage of its GDP that it spends on education and, notwithstanding this, the results are pathetic. The country requires a new system of government, with transparency in spending, control of waste at the state level and favorable results in governmental management. None of that is present in the bill. Without a radical revision of the way the monies are spent, the proposal will not lead to promoting and driving economic growth.

- The great taboo that infringes upon the initiative is that of the fiscal deficit. The notion of spending more than what flows into the coffers is neither good nor bad in itself.  However, it is of concern that the proposed fiscal bill does not even register the reasons for which the dogma of fiscal equilibrium was adopted and, worse, that the latter incurs in large and, potentially, enormous growth in public debt, for which an adjacent bill aims to modify the law of fiscal responsibility that was adopted precisely to make it impossible to break the fiscal balance at will. Failing to remember the causes of the crises could lead to the causing of yet one more, a novelty for the generations that never knew them. The old PRI.

At the end of the day, more than anything else, the initiative is a faithful reflection of the political moment. It is evident that the criteria that in the end prevailed were two: keep the PRD in the Pact for Mexico and pull the rug out from under López-Obrador. The President achieved both; the problem is that these criteria are not conducive to the accelerated growth of the economy.