The "Lightly Taxed" Mexicans Jude Wanniski August 14, 1997

Memo To: Pedro Aspe
From: Jude Wanniski
Re: Tax Debate

[Pedro Aspe, finance minister of Mexico from 1988 to 1993, is now teaching economics and finance at the University of Mexico. I faxed him the following memo this week after reading in The New York Times that Mexico is “lightly taxed.” Check out the rates below. By the way, if your company trades on the Mexico City stock exchange, the Bolsa, there are no capital gains taxes. If you are too small to make the Bolsa country club, you pay the ordinary, confiscatory rates.]

Hello Pedro... Sorry I missed you when you were in NYC. We continue to follow Mexico and note the stock market continues to creep back up -- making peso records, but still 50% below its record dollar level of late ’94. It appears the political parties are now debating what kinds of tax cuts to offer the people of Mexico -- and I wonder if you are part of that discussion in any way. Mike Warren, who follows Mexico for Polyconomics, tells me the debate has shifted away from cutting the IVA to adjusting the tax brackets. According to the latest tax table we have, the 25% income tax rate hits at US$4816, the 32% rate at US$6000, the 33% rate at US$6703, the 34% rate at $13519, and the top rate of 35% at $21,308.

Now these are extremely oppressive income tax rates, Pedro. You cannot allow people to tell you these rates only seem high because they are in U.S. dollars and wages are much lower in Mexico. They are punitive in any currency. In the U.S., nobody who makes $4816 pays an income tax. In Mexico, the government wants $604. The top rate of 35% is a fraud because the real killer is the 32% rate at $6000. How much money does the government collect from income tax? As far as I can tell from various sources, the government gets a grand total of $12 billion. If you flat out eliminated the personal income tax, you would collect that much extra on business and IVA tax in no time at all. Remember, if you give up $12 billion in revenue as an investment in a bigger economy, you only need to collect enough extra revenue to pay the interest on the government bonds floated in order to cover the shortfall.

What about our old friend, the capital gains tax? It collects almost nothing in revenue. It may even cost more to collect it than it brings in. Still, it remains on the books -- a threat to anyone who might strike it rich outside of the Bolsa.

What would I do? I would eliminate the capital gains tax entirely. I would have a three-bracket rate on personal income of 10% above $6000, 15% above $20,000 and 25% above $50,000. You have to think in terms of the dollar in setting the rates or you will set the thresholds too low -- and thereby prevent your workforce from getting wealthy. Even Keynes said a rate above 25% was self defeating. If you announced these rates in Mexico, the Bolsa would go through the roof, capitalizing growth rates of 10% annual as far as the eye can see. The Bank of Mexico would have to print pesos around the clock to keep up with the non-inflationary demand for liquidity.

The problem with the World Bank/IMF economists is that they go to work every day thinking about how to raise tax revenues in Mexico or Uganda or Bangladesh -- when instead they should be thinking about how to make Mexico, Uganda and Bangladesh rich!!

Please let me know what you think? And when are you coming back to NYC or Washington? I’ve been telling people the only way the PRI can hold the presidency in 1999 is with Aspe as the nominee. Why not? If you’re interested, I can start a rumor on Wall Street.