Mexico's War Over Taxes.(Brief Article)

In 1740, the story goes, father Juan Antonio de Vizarron, the Spanish viceroy in colonial Mexico, found refuge in the tiny hamlet of San Francisco Magu while he prepared his defense against accusations of treason. When the Spanish Crown finally dropped the charges and reinstated him as archbishop, he celebrated by issuing a decree, written on cowhide, forever exempting the town from taxes. The story has a problem: there is no evidence that it ever happened or that any such document ever existed. Don't tell that to the 10,000 residents of Magu, however. Nobody there has paid taxes for the last 261 years, and few have any desire to start now. "People here are willing to die before paying taxes," says 32-year-old Alfredo Martinez, whose unpaid job might best be described as sheriff. "I include myself [in that group]."

Death is the only thing certain in Mexico. The country has one of the lowest tax-collection rates in the world, and that partly explains why the government of President Vicente Fox needs cash. Last year taxes accounted for just 10.5 percent of GDP, compared with an average tax- collection rate of 18 percent in other developing countries (about 30 percent in Brazil and Argentina). By some estimates one third of the Mexican economy, more than $200 billion a year, can be found in the "informal sector"--meaning off the books. From big businessmen who practice creative accounting, to street hawkers who never issue receipts, to merchants who bribe taxmen, evading taxes is part of the national culture. After decades of corrupt politicians and inefficient bureaucrats, many Mexicans say they simply don't trust the government to spend their money.

Changing their minds is Fox's biggest challenge. He dethroned the long- ruling Institutional Revolutionary Party (PRI) last year with more promises than he cares to remember: to build more schools, to reduce poverty, to improve health centers. To pay for it all, Fox has proposed a fiscal- reform package, which has been submitted to the legislature, aimed at increasing government revenue by 2 percent of GDP, or about $12 billion. The plan would lower the highest tax brackets for individuals and businesses in hopes that more people will start paying their share. Fox has also proposed luring street vendors onto the tax rolls with promises of small loans. The centerpiece of the fiscal- reform bill is a new 15 percent tax on food and medicine--an idea that's already sparked fierce debate in the Congress. The stakes are high. Economists say Mexico needs a more stable flow of income to reduce its national debt, to wean the country from dependence on oil and to make the country more attractive to foreign investors.

Fox took office last December with approval ratings of 80 percent, but his plan to overhaul the tax system has ended his political honeymoon. Last week protests erupted in Mexico City over the proposed tax on medicine--despite government promises to spend part of the new revenue on subsidizing drugs for the indigent. Mexico's Congress closed down last week without ending its debate on the bill. Barring a special session, it won't take up the fiscal package again until September. Critics of the tax plan say that it punishes those who already pay taxes with-out doing much to bring deadbeats onto the tax rolls. Analysts predict that a watered-down ...