Introduction
Mexico is heading towards a fiscal crisis deeply embedded in the current regime’s DNA. The government has incurred a historic deficit of nearly 6% of the GDP in 2024, and this year’s deficit (approximately 4% of the GDP) will push the debt-to-GDP ratio over 54%, or 18 trillion pesos (bdp). The debt surge is staggering; it was 10 bdp in 2018. This percentage is alarmingly high given the state’s limited revenue-generating capacity and an extraordinary labor informality rate.
Labor Informality and Revenue Collection
More than 55% of workers in Mexico are informal, and the government collects a mere 23% of the GDP. Meanwhile, public spending is projected to exceed 10 bdp in 2026. Pensions, both contributory and non-contributory (“Bienestar”), will account for only 2.3 bdp. Additionally, there’s a growing stream of massive subsidies and political patronage (essential support for a populist regime), along with colossal losses from Pemex in refining and industrial transformation, as well as financial support, transfers, contributions, and tax reductions aimed at “rescuing sovereignty” for this failing company.
The Structural Deficit and Potential Solutions
This configuration results in a structural deficit that continually swells the debt year after year, with no apparent resolution except for: 1) drastic cuts to essential public services like health, education, security, environment, or infrastructure; 2) more debt, which will eventually become unsustainable; and 3) a significant increase in consumption taxes (IVA and IEPS) or income taxes (ISR). However, raising the IVA or applying it to food and medicine would be risky for the regime, while further increasing the ISR on businesses and individuals could have severe economic and political consequences.
The government has frantically turned to new, special taxes on savers, beverages, food, and video games; fiscal harassment, double IVA taxation, and exorbitant retention on digital platforms. These measures offer only temporary relief.
The Proposed Wealth Tax on the Super-Rich
Given these constraints, it’s not far-fetched to consider that the Mexican government might attempt to implement a wealth tax on high-net-worth individuals, or “superrich.” This idea draws inspiration from Gabriel Zucman’s proposal, a French economist specializing in inequality and tax havens affiliated with the École d’Économie de Paris.
Zucman’s proposal suggests that those with a net worth exceeding 100 or 1,000 million USD should annually pay at least 2% of their wealth. This is based on the relatively low effective tax rate enjoyed by the superrich.
The taxable base would include listed securities at market value, real estate, cash, bonds, artwork, yachts, private planes, etc. It would also encompass wealth held in investment funds, foundations, trusts, rental companies, and other entities created by the taxpayer. This presumes that it’s possible to identify the ultimate beneficiary of these vehicles, ensuring transparency and automatic information exchange with authorities. Moreover, it assumes barriers to tax evasion through residence changes or asset transfers to other countries.
However, historical evidence shows that wealth tax revenue collection is meager and administratively burdensome, with significant impacts on legal certainty and investment. Valuing private companies, artwork, and other non-listed assets is also challenging.
The superrich can change residency, obscure traceability, and conceal wealth through family members or nominees in various financial and administrative vehicles (foundations, trusts), or transfer assets to other countries or tax havens.
Moreover, wealth taxes are often unconstitutional due to their discriminatory nature and infringement on property rights. Success in litigation further complicates matters.
Lastly, paying 2% annually on largely illiquid assets might force the sale of assets to foreigners or unwanted borrowing.
Typically, income or yield is taxed instead of wealth accumulation due to these challenges. Wealth taxes have been suspended, abrogated, or applied only to real estate in various countries like France, Sweden, the Netherlands, and Germany.
Conclusion
The Zucman-inspired wealth tax appears impractical and irrelevant for addressing Mexico’s looming fiscal crisis.
Key Questions and Answers
- What is the current fiscal situation in Mexico? Mexico faces a significant fiscal crisis, with a historic deficit of nearly 6% of the GDP in 2024 and projected public spending exceeding 10 bdp by 2026.
- Why is a wealth tax being considered? Due to the limited revenue-generating capacity and high labor informality rate, traditional tax sources are insufficient. The proposed wealth tax targets the superrich to address the fiscal deficit.
- Who is Gabriel Zucman? Gabriel Zucman is a French economist specializing in inequality and tax havens, affiliated with the École d’Économie de Paris.
- What challenges does a wealth tax face? Historical evidence shows meager revenue collection, high administrative burden, and legal challenges. Valuing assets and ensuring compliance are also significant hurdles.
- Has the wealth tax been implemented elsewhere? Wealth taxes have been suspended, abrogated, or applied only to real estate in various countries like France, Sweden, the Netherlands, and Germany.
