It’s Time for Mexico to Tax the Rich

Mexico is one of the most unequal countries in the world, with a caste of superrich lording over a mass of urban and rural poor barely surviving. Andrés Manuel López Obrador’s transfer programs have gone some way toward distributing wealth, but much more needs to be done.

President of Mexico, Andrés Manuel López Obrador, during his daily morning briefing on June 10, 2020 in Mexico City, Mexico. (Hector Vivas / Getty Images)

“Austerity and the fight against corruption will allow us to free up sufficient funds, more than we can imagine . . . to stimulate the development of Mexico,” said President Andrés Manuel López Obrador (AMLO) in his inaugural address on December 1, 2018. “With this simple formula of ending corruption and putting republican austerity into practice, there will be no need to raise taxes in real terms, and this is a commitment I am making.”

“Austerity,” “no new taxes”: Just what kind of administration was AMLO launching only minutes into his presidency? A year and a half later, and with the aggravating circumstance of a COVID-19-induced recession in the offing, both the successes and limitations of the president’s fiscal policy have become much clearer.

A Politics of Principle

AMLO took pains later in the same speech to distinguish his definition of the word austerity from the one that has ravaged economies worldwide. “[It] does not mean, as is thought in other countries, a mere collection of adjustments in productive and social expenditure. Here we understand it not only as an administrative matter, but as a politics of principle, one that implies ending the privileges of the top-level bureaucracy. [Former president Benito] Juárez said that public officials must learn to live with a just sense of moderation, and we sustain that there cannot be a rich government with a poor population.”

In other words, what AMLO has argued for, here and elsewhere, is a moral understanding of austerity: the idea, inherited from Rousseauian republicanism and the nineteenth-century liberals who laid the foundations of the modern Mexican state, of enlightened governors who live within their means and lead by example. In a country oppressed for centuries by top-heavy, centralized administrations, from the viceroys of New Spain to the “Pharaonic” presidencies of recent times, the message is a potent one.

The sight of former president Enrique Peña Nieto winging around the world with his expensive retinue in a luxury plane so large it required the building of a custom hangar, while members of the government used official helicopters for golf outings, and his wife had a multimillion-dollar home built in the exclusive Lomas district of Mexico City (by the same chummy contractor that built the airplane hangar), rankled to the core a public scraping by with an average wage of little over US$500 a month.

This idea of exemplary austerity, combined with the liberation-theology-inspired concept of the preferential option for the poor (the slogan for his first presidential run in 2006 was “Por el bien de todos, primero los pobres,” or “For the good of all, the poor come first”) combined to give AMLO’s message an ardor that has underpinned its success.

As opposed to the crop of bland technocrats who have occupied the center-left terrain in much of the Anglophone world, AMLO speaks with a simple and clear moral urgency, one that goes over the head of the fickle middle class to speak directly to the half of the nation living in poverty. Where the Left in other countries has ceded the concept of morality to the hypocrisy and fundamentalist pandering of the Right, AMLO has made it his own.

If It Walks Like a Duck

AMLO’s vision took legislative form in the eponymous Law of Republican Austerity, passed in November 2019. Among the stipulations were a ten-year ban on public servants joining private companies they had a part in supervising or regulating; the ability to nullify contracts derived from influence peddling; limits on top salaries, office expenses, government-financed travel to congresses and conventions, advertising, and the assignation of drivers, secretaries, and outside consultants; a crackdown on agencies duplicating the same functions; a ban on the purchase of luxury vehicles, on unnecessary office remodeling, and private savings, pensions, and health plans for public servants; the prohibition of nepotism in hiring; and a crackdown on the proliferation of public trust funds, too often used for discretionary purposes.

Few would argue with these provisions, nor with the overarching need to attack the excess and corruption of prior administrations in order to free up funds for the president’s social agenda. The problem is, in order to fully finance his priority projects — the national guard, maintenance scholarships for students and apprentices, old age and disability pensions, aid for farmers, and big-ticket infrastructure items such as the new Mexico City airport, the Dos Bocas oil refinery, and the controversial Maya Train project in the Yucatán Peninsula — he has also had to resort to stiff cuts elsewhere. Particularly hard hit have been the areas of tourism, culture, the environment, scientific investigation, and archeology, a situation aggravated by a COVID-19-induced executive order requiring swingeing cuts in agencies’ operating expenses for the rest of 2020.

The argument can and has been made that these cuts were necessary to clip the wings of the “golden bureaucracy” that has continued to squander money at the highest levels of administration. And although there is no doubt that this is true, this justification can only go so far. AMLO, it is to be recalled, ran for president in 2018 on a platform calling for a balanced budget. And while all of this has kept the vultures of international lenders away — at the same time that neighbors such as El Salvador have succumbed to the temptation of an IMF loan to fight COVID-19 — an uncanny resemblance begins to present itself between AMLO’s macroeconomic policy and the strictures of orthodox economics. How much of his vaunted moral austerity, then, is also economic?

Taxes Are for Suckers

A primary factor underlying AMLO’s “robbing Peter to pay Paul” budgetary maneuvers, as we saw at the outset, is his refusal to generate more revenue through taxes. What he has done in recent weeks, to great success, is to crack down on companies that issue false tax receipts and goad some of the country’s largest tax delinquents into coughing up what they owe.

Companies such as Walmart, Toyota, IBM Mexico, and FEMSA (owner of the OXXO chain of convenience stores) have agreed to settle up back taxes, late fees, and fines to the tune of some $30 billion pesos (US$1.3 billion). So incensed was the owner of FEMSA, José Antonio Fernández Carbajal, at having to pay his taxes that he promised to pour double of what he owed into defeating AMLO in the recall referendum scheduled for 2022.

All of this is well, good, and necessary. But it is no substitute for an integral tax reform. Mexico’s tax-to-GDP ratio of 16.1 percent, less than half of the OECD average, ranks it dead last among member countries. Lulled by decades of oil revenue and immigrant remittances, it has created a tax code that is an open invitation for the wealthy to evade. On paper, Mexicans pay taxes at levels that are practically European: a progressive income tax (ISR) of up to 35 percent and a value-added tax (IVA) of 16 percent. But because of a generous system of write-offs — including private school tuition, private doctor’s visits, and every peso of the IVA incurred in business expenses — wealthy individuals and corporations wind up getting most or all of this back, and can even wind up with hefty balances in their favor to apply to subsequent years.

Meanwhile, the “captive contributors” (salaried employees and the poor) are left to foot the bill. What is more, special tax rules allow corporations to put off paying taxes, sometimes for years. And thanks to the nation’s extremely low capital gains rate of 10 percent, businesses can be bought and sold on the stock market with precious little going to public coffers — such as the nation’s banks, most of which were gobbled up by foreign concerns before even this modest levy existed.

The result is one of the most unequal countries in the world, with a caste of superrich lording over a mass of urban and rural poor barely getting by. And while AMLO’s transfer programs have gone some way toward distributing wealth, these programs will only ever be a palliative without a serious effort to overhaul a deeply unjust tax system.

Gaining Steam

The phenomenon of upper-class tax avoidance, of course, is a pan–Latin American problem. And recent polling evidence suggests a growing consensus throughout the region on the need to tax large fortunes. In Chile, following a tax hike on the wealthy passed in the winter as a response to the fall uprisings, its Congress passed an additional 2.5 percent tax on fortunes in May in order to finance an emergency basic income program during the COVID-19 crisis. Similar measures are being debated in Argentina, Brazil, Ecuador, Paraguay, Peru, and Bolivia by presidential candidate Luis Arce.

It would be exceedingly ironic if AMLO, who has made a crusade out of exposing the privileges, cronyism, and corruption of the “white-collar mafia,” were to remain isolated from this trend. If he considers austerity to be such a moral virtue, it is time for Mexico’s superrich to experience their share of it.