Government revenues and their classification
The Mexican government’s main source of financing is taxes, which, despite having increased with the 2014 tax reform1 , are still the lowest, measured as a percentage of GDP, among OECD member countries.
Looking at total tax collection, excluding social security contributions, Mexico is the country with the lowest collection, at 14.1% of GDP3, in 2017. Among the countries analyzed, the one with a collection closest to Mexico’s is Chile, with 18.7% of GDP, while the one with the highest collection is Norway, with 27.6% of GDP.
When disaggregating collection into federal and local, it is observed that Mexico has a greater dependence on federal collection than the rest of the countries. Federal tax collection in Mexico is higher than in Germany and the United States; however, at the local level it is the lowest by a considerable margin. Local revenue collection in Mexico represents 0.9% of GDP, while the OECD average is 5.1% of GDP (Figure 1)4.
State revenues examples
A convenience of dividing them in this way is that it is possible to approximate certain types of income with those that come from the same economic activity (i.e., tax), in contrast to those that come from the exploitation of natural goods or capital, as well as those that do not come as a direct consequence of the economy (i.e., non-tax). The social security contributions of workers and employers are not considered as tax revenues.
As mentioned above, the LIF division of subsections 1.2.1 and 1.2.2 are not mutually exclusive; there are overlaps (some larger than others) between them. Table 4 shows the matrix considering oil and non-oil revenues as divisions, as well as tax and non-tax revenues.
This section by no means pretends to be exhaustive on the most important issues to be analyzed within the LIF. However, the following 3 considerations are presented, which, due to the short, medium and long term challenges they represent, and the burden (or not) they may represent for future generations or for the long term social welfare, are important to highlight.
Where state revenues come from
A government’s budgets, revenues and expenditures, are set up to enable the government to meet the policy objectives it has set. However, any new government finds itself with an established revenue and expenditure structure and making radical changes is often difficult and time consuming.
In private market systems where the main sources of wealth are created by private groups, individuals and companies, in principle, the objective of any government should be to impose as little as possible on this productive environment.
Heavy taxation will have the impact of reducing the incentive to invest in new businesses, hire new employees and increase capital outflows, with the resulting reduction in economic activity, causing less growth, less wealth and more poverty.
Any inherent taxation impacts economic incentives and, as a consequence, has the effect of reducing economic activity. In other words, if the government takes away everything I generate in taxes, I will not start a business and I will not work.
How the state obtains revenues
These are the revenues that constitute the normal and periodic source of fiscal resources obtained by the federal government to finance its activities. It is a part of the governmental revenues obtained by the State by making use of its coercive power unilaterally; or by a mandatory consideration; that is to say, it includes the resources that imply a debt obligation. These are permanent and predictable. They are divided into: 1) current revenues and 2) capital revenues.
Current revenues are classified into two main categories: i) those obtained through the SHCP (tax and non-tax) and, ii) those obtained through agencies and parastatal companies.
Tax revenues are obtained through fiscal taxes on purchases and sales, consumption and transfers. These taxes include income tax, asset tax, VAT, IEPS, foreign trade tax, property tax and ISAN.
The resources obtained by the various entities that make up the Parastatal Sector originate mainly from the sale of goods and services offered to the community as income from recoverable expenditures; from the sale of fixed assets; capital contributions and transfers from the Federal Government, as well as internal and external financing.