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Mexico's dilemma after U.S. tax reform: lowering taxes or waiting

Companies, banks and academics disagree on the impact on competitiveness and investment

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Mexico's dilemma after U.S. tax reform: lowering taxes or waiting

Trump's fiscal reform has become an advance Christmas present for large U.S.-based corporations, which will see reduced nominal tax rate to which ir earnings are taxed from 35% to 21%. Also in a headache for those who watch over stability of U.S. Treasury, which will be reduced ir income and for those who see tributes a useful tool to reduce inequality: changes increase system's Reescalation Prosecutor as a whole. But its effects go beyond frontiers of world's first power. The great European powers have been put on stand of war for effects y fear can cause on bilateral trade and investment. And Mexico, perhaps country that most directly depends economically on US, fears a real tsunami in form of flight — or, rar, repatriation — of capital to its norrn neighbor.

Is that so? Around this question have revolved in recent weeks specialized forums, studies of analysis houses and articles of opinion in specialized press. And hours and rivers of ink afterwards, answer is not rotund. Even in private sector itself, re is no consensus: while large business organizations try to bring water to ir mill and take advantage of situation to lighten ir tax bill, government, banking and specialized scholars call for caution to The expectation that arise effects of reform or, directly, categorically deny need to lower taxes in Mexico in response. Although public debt is under control – just over 50% and falling – and US country will harvest this year its first primary deficit (metric that does not take into account cost of repaying liabilities) since 2010, fiscal pressure in American country is one of The lowest of advanced countries and an additional turn of nut would furr reduce already reduced possibilities of collection.

Last week, main Mexican employer, Coparmex – whose affiliates add up to third of GDP –, urgeded executive of Enrique Peña Nieto (PRI) to undertake a remodeling in Mexican tax scheme that will make him "recover competitiveness International ". The employers ' request goes through a reduction in income tax payable by companies at a percentage point per year to average of Organization for Economic Cooperation and Development (OECD): something less than 25%, compared to 30% of Latin American country — although effective rate is actually around 12%. In return, y point from Coparmex, VAT could be expanded "with compensatory strategies for lower-income households."

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In same line, President of Business Coordinating Council ( umbrella under which all major Mexican employers ' organizations meet), Juan Pablo Castañón, advocates, in conversation with country, for "deregulation" as guiding axis of Public policy. In or words, taxes are lowest possible, especially for smaller companies, "as long as y are not against debt and fiscal balance." The head of employers has already asked Ministry of Finance to create a work table to "respond to fiscal reform" of Trump.

The concern is, to some extent, understandable. The United States is, by far, first country of origin of foreign investment in Mexico and sums as much as five nations that follow it in table: Spain, Germany, Israel, Canada and Japan. But drastic decision to lower business taxes may not be most accurate. "We do not believe that Mexico has to lower its fiscal pressure on large companies; He doesn't need it to compete, "says Carlos Serrano, chief economist of Mexico's largest bank, BBVA Bancomer. "The labor cost per hour in manufacturing is six times lower here than in US and only that factor would maintain Mexican competitiveness even tax reform through. But re is more: depreciation of weight, in a flexible exchange rate scheme like current one, also helps and a lot. " Since Trump began to become a real alternative to reach White House, Mexican currency has depreciated more than 10% against dollar which, in practice, has made Mexican products 10% cheaper to American eyes without having changed NA It gives in its production line.

Taxation "is not only reason, not even main one" when a company weighs wher or not to invest in a country: "Or factors weigh much more", adds Serrano. And, taking into account all se reasons, "Mexico would still be, in worst case, 20% more competitive than US," adds Bancomer's chief analysis officer. "Lowering taxes on companies just because Trump does it would be fiscally irresponsible."

From Citibanamex, anor major Mexican bank, diagnosis is similar: "The net effect of US tax reform on Mexico may not be as negative as it is supposed to; The point of view that currently predominates may be biased prematurely in a negative direction, " analysis team points to a recent customer note. "We don't see need to precipitate a political response." In or words, nothing of a short-term tax cut; Long, we'll see. "Mexico will have enough time to make potential adjustments during normal negotiation process of federal economic package [budgets]. Instead of a quid pro quo response, we see a good opportunity for a solid and objective debate about what we can do to improve Mexican tax system. "

In same line, Rodolfo de la Torre, researcher at Centre for Espinosa Yglesias Studies, asks first of all a "diagnosis, through models, of macroeconomic effect on Mexico". To do this, he stresses, it would be very important to "have an independent fiscal council" that provides Treasury with information needed to make decisions. The implementation of this entity has been one of great recommendations — neglected by government of Peña Nieto — of International Monetary Fund (IMF) in recent years. Second, De La Torre sees need for a "recomposition" of public spending, cutting current part and increasing investment in infrastructure to "gain competitiveness and neutralize Mexico's lower fiscal competitiveness."

"Only if it's not enough, it might be necessary to reduce corporate rate," adds Economist. However, this reduction in tax burden on companies — by definition, regressive — should be accompanied by an increase in two state or local-owned taxes: The property (which falls on real estate) and that of vehicular ownership. Both fall on higher incomes, so ir increase would help to alleviate increase in fiscal inequality that would generate tax-lowering to companies. "All analyses I have seen so far seem superficial to me," completes Manuel Molano, director general of Mexican Institute for Competitiveness (IMCO). "The most important thing is effective rate for companies that remain behind reform, and I have many doubts that it is lower than y have today," he closes. "At all costs, to do something, we would have to reduce tax on labor, especially less-earning employees: we cannot forget that competitive advantage of United States is in capital and ours, in workforce."


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