Hot Spots: Mexico.(hot spots)

Not much time has passed since Felipe Calderon moved into the presidential residence, Los Pinos, last December, following elections which he won with only the narrowest of margins. He has already shown, however, that he, the man with a master's degree in public administration from Harvard University's John E Kennedy School of Government in Cambridge, MA, is a much better negotiator and much more adept in dealing with an often obstreperous Congress than his predecessor, Vicente Fox, ever was. His administration has been tackling long-needed structural reforms with vigor and determination and has made more progress with them than most pundits would have deemed possible at the time when Mr. Calderon donned the sash of office.

In March, rather remarkably, the Senate voted 85 to 32 to pass a bill that takes a first stab at fixing a pension system headed for bankruptcy by raising the minimum retirement age for civil servants and by increasing workers' contributions. Mr. Calderon succeeded in this quest by persuading the Institutional Revolutionary Party (PRI) to support him. The PRI had opposed every significant government initiative when Vicente Fox was president, and since no PAN administration can count on any support from the left-leaning PRD, this blocked all progress. Mr. Calderon, though, has been able to persuade the PRI that it can improve its public image (after a disastrous election performance) by backing some of his initiatives. The pension reform is the first major piece of economic legislation passed in Mexico since a tax increase in 1995.

In its second big move on the legislative front, the government submitted a comprehensive tax reform bill. It seeks to boost tax collection by about 30% over the next six years to reduce the government's dependence on revenues from oil, which currently fund more than one-third of federal spending. This is essential because (1) Mexico currently has Latin America's second-lowest tax collection rate, after Guatemala, and (2) Cantarell, the main oil field of the state oil company Petroleos Mexicanos, is producing less and less.

The government's initiative aims to raise the share of non-oil tax revenue as a percentage of total to about 13% from roughly 10%, basically by targeting companies. This is to be achieved with a flat-rate alternative minimum tax (16% in 2008 and 19% in 2009) on net revenue, or the current corporate tax on profit, which ever is higher. The tax on revenue has the big advantage that it is much easier for the authorities to enforce and sidesteps all arguments with special interest groups about income tax deductions.

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Getting this also much-needed initiative through the legislature will not be easy. For one thing, the proposed reform, which will be debated in Congress this summer, is based mainly on an increase in the tax burden on companies, without providing economic growth incentives. It risks increasing the informal sector of the economy, which manages to evade all tax obligations and is already massive. It ignores the excellent experience so many emerging markets have made with the introduction of a single, low "flat tax" on corporate earnings, and it ...