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The London School of Economics and Political Science The Political Economy of Tax Collection in Mexico: The Constrains on Reform, 1970-2000 by Armando Jimenez San Vicente A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Department of Government The London School of Economics and Political Science London 2002 UMI Number: U615229 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U615229 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 gook ii+w 59 Abstract This thesis aims at explaining the reasons behind Mexico’s tax revenue stagnation, by exploring the structural weaknesses of the tax system, identifying the main actors in the tax policy making process, and studying the tax reforms attempts and the role policy actors played to shape them in the last thirty years. The dissertation first shows Mexico’s low tax collection yield and its stagnation for more than thirty years. The analysis portrays an inefficient tax collection system, with a tax structure plagued with a plethora of privileges and exemptions that dilute collection. A large number of interviews with public authorities, politicians, intellectual, representatives of businesses, social and international organizations showed a common concern over Mexico’s low tax effort. An issue, which surprisingly has always been in the rhetoric of the political agenda, but has received very little political, social or scholarly attention. The thesis rises a puzzling paradox. By looking at the dynamics of tax reform, the evidence seems to suggest that even in a strongly centralized and hierarchical state like Mexico, frequently depicted as authoritarian, policy makers have been constrained to shape tax policy. Government’s policy objectives and the “uniqueness” of the relationship with socio-economic actors, principally the business community, have affected the nature, profile and outcome of the tax reforms. I argue that the Mexican political system has been upheld by a very fragile political coalition with socio-economic actors, which has become the most important constraint on reform. The historical analysis shows that a substantial tax reform has been avoided, despite that increasing government revenue is crucial for the long-term economic development of the country. Instead, the government pursued other less politically troublesome means for financing the State. However, these alternative revenues- raising policies exacted a very high social and economic cost in he long run. The study of the tax policy decision making highlights the dominant role of politics in the policy making process, concluding the clientelism best describes the politics of ii tax policy making. As a result, the current shape of the Mexican tax system responds largely to the political accommodation of powerful vested interests. Economic policies have been subordinates to political stability, as well as upholding the fragile coalitions that support the Mexican political regime. To my father with love. I did not become the medical doctor he wanted me to be, however as he says, I still can try to cure some of my country’s social diseases. Acknowledgments I want to express my deepest gratitude to the people and institutions that made my doctoral studies possible. This is certainly a lonely process, where you test your skills and abilities to its limits. A Ph.D. thesis is a personal and professional goal that without the support arid encouragement of those “special people” behind, it would have been much harder to accomplish. To my family, Armando, Pily, Tessy, Jose Luis, Marthita, Pily, Pepe Torio, Paola del Pilar y Valeria Monserrat for their love and support. To all my friends for their encouragement, particularly to Agustin and my “compadres” Jorge and Viridiana, and the Aguilar, all part of this wonderful experience. I also would like to thank those academics that believed in my topic of research and helped me to develop it, in particular my supervisor Dr. George Philip who despite the political sensitivity of the topic and the lack of scholarly attention in Mexico, encouraged me to pursue it. Who would believe that few years into it I would have more than a hundred interviews with many of the key actors in the last three decades, plus so much internal data from the Secretariat of Finance and Public Debt that I would not be able to publish it due to its confidentiality. I am particularly grateful to my external advisor Carlos Elizondo who’s articles planted the seed that developed in my interest in tax matters, to Patrick Dunleavy from the LSE for his valuable time and advise on key moments of the thesis. To professors Alan Knight and Lawrence Whitehead for inviting me to take classes with them at St. Anthony’s College, at Oxford university during three consecutive years; being part of the Mexican seminar was a cherished experience that helped me to develop many of the lines of thinking of my thesis. To Professor Victor Bulmer- Thomas, former Director of the Institute of Latin American Studies for his inside and comments about Mexico and economics. A doctoral programme is a lifetime experience, and there are so many people who have become a very important part of such an experience, therefore it is impossible to mention all those involved in such short space. I had the great fortune of making long lasting friends during my time in London, for their personal support and that given to the Federation of Mexican Students in the UK, that I was honoured to lead, my deepest gratitude. To my dear friend Baroness Gloria Hooper, President of Canning House, the best friend of Mexico; to Michael Mowlan, Director for the Americas, Department of Trade and Industry; Michael Valdes Scott and his team at LATAG; Jean Moorhouse, Director for Latin America at the Bank of England; Vijay Vetseran, Chief Editorialist for the Economist; Anthony Westnedge, former Director Canning House; and Prof. Anthony Giddens, Director of the London School of Economics and Political Science. To my fellow countryman at the Mexican Embassy and the Mexican Student Societies in the UK, particularly to Ambassador Andres Rozenthal for giving my wife the chance to work with him, Ambassador Santiago Onate and my former boss Fernando Estandia, commercial and financial representative in the UK, and lastly to all true friends of Latin America at Canning House younger members group. For their financial assistance in order to make the doctoral studies possible, I would like to thank CONACYT, the Science and Technology Council for lending me the money to pursue my research abroad and to the British Council for granting me a “Chevenning” scholarship. But overall, I am in debt to my country for giving me the opportunity of been one of the privileged ones who studied abroad. Such distinction carries a hefty responsibility: the promise of bringing something back to Mexico, which could translate into proposals for developing a more dynamic and equitable country. I promise to my fellow countryman to make my best effort to apply what I have learned for the benefit of my people, particularly for those who have been traditionally neglected. London, May 1st 2000 Table of Contents A bstract ....................................................................................................... ii Acknowledgements ............................................................................................................ v Table of Contents........................................................................................................... viii List of Tables and Figures............................................................................................... xi Introduction .......................................................................................................................... 1 Aims and Conceptual Synopsis ..................................................................................... 6 Synopsis of the thesis .......................................................................................................... 9 Chapter I Mexico’s Low Tax Collection: Lagging Behind After Thirty Years of Reform.............................................................................................................. 13 1 . 1 Mexico’s Tax Collection Effort in a Comparative Perspective ................. 14 1.2.- The Consequences of an Inefficient Tax System ................................................ 20 1.3.- Neutral Reforms: No Revenue Gains after Thirty Years.................................... 25 1.4.- Has the Fragility of the Tax System Been Ignored the Past Three Decades? ............................................................................................................................... 30 1.5.- Academic Attempts to Explain the Fragility of the Mexican Tax System and the Factors that have Constrained its Development............................................ 37 1.6.- Four Possible Explanations to the Constraints on Reform................................ 42 Chapter II Tax Fragility and
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