Home' Trinidad and Tobago Guardian : September 19th 2013 Contents SEPTEMBER 2013• WEEK THREE www.guardian.co.tt BUSINESS GUARDIAN
THE ECONOMIST | BG27
Since Mexican director Alejandro
Gonzalez Inarritu made "Amores
Perros" (2000), a gritty tale about
dogs, crime and violence, the
status of canines in society has
improved a good bit. In middle-class parts of
Mexico, dog hotels, dog stylists and even
"organic" waste-disposal bins are so prevalent
that having a pooch has become a symbol of
No wonder, then, that the middle class is
howling over a proposed tax reform unveiled
on September 8. Not only does the plan seek
to raise taxes on everything from salaries of
more than US$38,000 to private schools, but
also it slaps a levy on dog biscuits.
Big businesses, too, are snarling. They claim
to be perennial hostages to the taxman, forced
to fork out more every time Mexico attempts
to improve its measly tax take, because 60
percent of the working population pays noth-
ing. The reform aims to squeeze even more
out of them by banning tax consolidation,
which enables big firms to offset profits in
one business with losses from another, and
by slashing their ability to write off employee
benefits for tax purposes.
The reform also includes an anti-obesity
"sin tax" on soft drinks---Mexicans are the
world s biggest Coke guzzlers and have girths
to show for it---and, for big users of energy,
the unexpected introduction of a carbon tax.
The main aim of President Enrique Pena
Nieto is to raise the tax take, which at 14 per
cent of GDP is below the Latin American aver-
age, and cut the government s dependence on
Tax experts are divided on the merits of the
reform. Provided that it gets through Congress,
where business lobbyists will seek to reinstate
exemptions, some believe that it may bring
three benefits. First, by emphasising income
tax rather than extending value-added tax,
the reform is modestly redistributive. Second,
it ends special treatment for certain industries,
a big source of tax avoidance. Third, it attempts
to offer something tangible in return for the
sacrifice of paying: a universal pension system
and limited unemployment insurance.
All that looks good on paper. In the real
world, though, it gets grubbier. The government
says that it decided not to extend VAT to food
and medicine to spare the poor. In reality,
businessmen say, it was probably at least as
much concerned about tamping down left-
wing protests against Pena s attempt to crack
open the state oil industry. That looks politically
astute but economically suspect.
Though the reform seeks to broaden the
range of taxes people must pay, it offers only
piecemeal incentives to bring new taxpayers
into the system. There is little pressure on
those in the informal economy to pay taxes
instead of bribes. That feeds the sense that
the proposals simply exploit a captive middle
class. In an attempt to redress the balance, all
political parties said that they may block Pena s
attempt to charge VAT on private schooling.
Alil Alvarez, a tax lawyer, says that the draft
income-tax law was riddled with basic mistakes
and looked far less redistributive than it could
be. She says that companies are likely to
respond to the curb on deducting employee
benefits by cutting jobs. They also may pass
on a new 10-percent tax on dividends by cut-
ting payouts to shareholders. She expects chal-
lenges to parts of the reform in the Supreme
The most pressing question is whether the
new tax code will help or hinder the revival
of a stagnant economy. The government said
that the promise of more tax revenues in the
future gave it the leeway to go into the red
this year and next, projecting deficits of 0.4
per cent and 1.5 per cent, respectively. Two
days earlier the central bank ordered a quar-
ter-point drop in its main lending rate, the
second this year, even though inflation, at 3.5
per cent, is slightly above its target. In a country
with a fetish for low inflation and balanced
budgets, both announcements came as unex-
pected economic tonics.
Yet the prospect of higher taxes might cause
middle-class consumers to tighten their belts
at the very time when the economy could do
with some extra spending. To counteract that,
the government is hoping that its proposed
energy reform will bring an investment bonan-
za. Until that is in the bag, however, the risk
is that almost everyone will feel worse off.
Except dogs, perhaps. If pet food is subject
to VAT and ordinary food is not, some owners
may be tempted to buy them steaks instead.
@2013 Economist Newspaper Ltd. (Distributed
by the New York Times Syndicate.)
Mexico's rocky road to fiscal reform
For most of Francois Hollande s beleaguered presidency,
the French economy has gone from bad to worse. It tipped
into recession late last year, and unemployment is at a 16-
Now, however, the first signs of a recovery have emerged.
This week the Bank of France revised upward its forecast
for third-quarter growth from 0.1 per cent to 0.2 per cent,
after a stronger-than-expected second quarter. Earlier this
month the Organisation of Economic Cooperation and
Development, which had predicted recession in 2013, said
that it now expects the French economy to grow by 0.3 per
For the battered Hollande, this is soothing balm.
"The recovery is here," he proclaimed in July.
As good news trickled in during the summer, Finance
Minister Pierre Moscovici talked of the government s "ambi-
tious reforms ... bearing fruit." On September 11, even as
he said that France would miss its budget-deficit target yet
again, Moscovici was determinedly upbeat.
"We are doing rather better than the average in Europe,"
With bad presidential poll ratings and low confidence,
the government is eager to seize on any hint of a rebound.
Consumer spending has been buoyant. Household and
business confidence inched up in August. Stronger growth
in America and an improved outlook in the euro zone and
in Britain should lift France. Indeed, GDP has returned
almost to its level in 2008.
A recovery would be politically handy too. Hollande
extravagantly promised voters that unemployment would
start to drop by the end of the year. He also has squeezed
taxpayers so hard that Moscovici confessed recently that
people are "fed up with taxes." A recent Le Monde headline
said that there had been no fewer than 84 new taxes in the
past two years, starting under Nicolas Sarkozy, Hollande s
centre-right predecessor. The tax take has reached 46 per
cent of GDP, the highest in the euro zone. Last month,
when the pollster Harris Interactive tested words that voters
link with the president, by far the most common was "taxes."
Having campaigned for office on a promise to slap a 75-
per cent tax rate on the rich, Hollande has now called for
a "tax pause." Unveiling the outlines of his 2014 budget,
to be announced on September 25, Moscovici promised
that 80 per cent of the effort to reduce the deficit next year
would come from spending cuts, worth 15 billion euros,
with only three billion euros in tax hikes, and that corporate
taxes would be simplified.
In a country temperamentally inclined to pessimism, the
change in mood is welcome. Confidence is sorely missing,
and constant fiddling with extra taxes has created a nervous
uncertainty that deters investment and hiring.
However, the data are more mixed than the government
is making out. Industrial production fell in July, and even
firms that are starting to invest are still not hiring. The
private sector shed 34,600 jobs in the second quarter, and
unemployment edged up to 10.9 per cent, suggesting that
Hollande can keep his unemployment promise only if he
subsidises jobs. This week Moscovici downgraded the official
2014 growth forecast from 1.2 per cent to 0.9 per cent.
"This is a very slow recovery," says Laurence Boone, the
chief European economist at Bank of America Merrill Lynch.
"It is not a rebound."
The concern outside France is that overoptimism about
the economy may ease the pressure to improve compet-
itiveness. Hollande seems to prefer minimalist reform
without protest to taking on vested interests so as to achieve
something more ambitious and long-lasting.
"His hallmark is caution," one Socialist deputy says.
The latest example is his pension reform, designed to
plug a US$27 billion deficit by 2020. It does not increase
the retirement age. It lifts the pension-contribution period
from 41.5 to 43 years, but only for those born after 1973.
It leans heavily on higher contributions by employers and
employees. It does not make up the system s shortfall, and
it does not touch public-sector pensions at all.
Pierre Gattaz, the new head of Medef, the bosses club,
has dismissed this as a "non-reform." Even the unions
opposed to the reform could not draw many people onto
the streets in protest this week, because there was so little
to be angry about.
In perhaps the most damning comment of all, Olli Rehn,
the European economic commissioner in Brussels, dismissed
it as a "reform a la francaise."
Other reforms to the country s tentacular welfare system
lie ahead, including to the generous unemployment-benefit
system and to a vast fund drawn from compulsory training
So do municipal and European elections next spring,
though. A fading sense of urgency and a political desire to
soothe disgruntled voters are making it ever more likely
that future reforms will consist not of a thorough overhaul
but still more "reformettes."
@2013 Economist Newspaper Ltd. (Distributed by the New
York Times Syndicate.)
In France, the downside of recovery
President Enrique Pena Nieto
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