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ICYMI: A Flat Tax Lesson from Mexico

July 3, 2012 by Amity Shlaes

This op-ed by Roberto Salinas-Leon has appeared in the San Antonio Express News, Clay County Advocate-Press (Flora, IN), Press and Journal (Middletown, PA), Green Valley News and Sun Publishing (Green Valley, AZ), Nogales International (Nogales, AZ), Stratton Spotlight (Stratton, CO), University City Review (Philadelphia, PA), Weekly Press and Review Newspapers (Philadelphia, PA), Ceres Courier (Ceres, CA), Wilson County News (Floresville, TX), La Prensa (San Antonio, TX), The Reporter (Long Beach, CA), Penny Press (Las Vegas, NV), YourValleyVoice.com (McAllen, TX), The News Democrat Leader (Russellville, KY) and Investor's Business Daily (Los Angeles, CA). In this op-ed, Roberto Salinas-Leon takes a look at how the idea of a flat tax to simplify the tax code can and has gone terribly wrong in Mexico, resulting in a more complex system with greater compliance costs, defeating one of the main purposes of a flat tax. The experience of Mexico with a flat tax regime, during the presidency of Felipe Calderón, managed to do the exact opposite of what the flat tax ideal is supposed to do. While the final rate of 17.5% on earnings is manageable (barely), the IETU (as the tax is known in Mexico) was introduced as an alternative tax to the prevalent income tax. The latter is riddled with a huge number of deductions and special interest exemptions, which makes it tremendously complex. Salinas-Leon says: “But now, companies and individuals must determine their tax obligations under both alternatives, and must pay the higher of the two, making the flat tax available only to companies and individuals who did not benefit from the exemptions relative to the flat tax. For all of these, the flat tax turned out to be an effective tax increase. This would have made sense had the income tax been eventually replaced by the flat tax. Instead, it merely added overwhelming complexity and cost to a very onerous compliance system, and with it, high transaction costs plus the incentive to continue with methods of evasion. The confiscatory and purely revenue-gathering focus of Mexican politicians ignored that the great benefit of a reliable flat tax is that it must be low, and it must be simple. In the process, the flat tax idea has gotten a bad (and totally undeserved) name.” In the op-ed, Salinas-Leon warns: “American policymakers need to avoid our mistakes. The U.S. tax code needs to be simplified. There could soon be the political will for installing a national, uniform flat rate. When legislators go about writing that rate into law, though, they must keep it pure and simple—and fight back against any special-interest scheming to recreate the costly and inefficient rules of the past.” Read the full op-ed here. Roberto Salinas-León is the president of the Mexico Business Forum, coeditor of Money and Markets in the Americas: New Challenges for Hemispheric Integration and was a guest speaker at the Bush Institute’s April conference on Economic Growth.