The Texas and Mexico economies are inextricably linked. As my colleagues Michael Cox and Rick Alm found, Texas and Mexico trade more with each other than with any other country or state. So, when Mexico implements anti-growth policies, Texans should be concerned.
Facing a lagging economy, Mexico’s new populist President Andrés Manuel López Obrador unveiled a ten-point plan to reactivate growth and industrial output and “generate a climate friendly to business that inspires certainty.” His administration has also reassured investors that he is committed to “respect rights to property as inherent human rights.”
That all sounds good, but the Mexican people already suffer from one of the worst legal systems and one of the weakest protections of private property rights in the world. According to the 2019 Economic Freedom of the World Report, Mexico ranks 122nd out of 162 countries for its “legal system and property rights.”
Despite those conditions, AMLO recently launched an assault on businesses and persons that “do not pay their fair share and work tirelessly to avoid paying taxes.” Tax evasion is an endemic problem in Mexico. Yet, the AMLO administration’s proposed cure would be worse than the disease.
It would construe tax evasion as a crime commensurate with organized crime, and thus equivalent to the worst crimes of murderers or kidnappers, on a par with El Chapo. The spirit of the law is clear: the government wants to crack down on creative, albeit illegal, methods to reduce profits and income, especially the wanton practice of using phony companies and purchasing false invoices.
But the practice of the law threatens nuclear overkill, as it renders citizens without due process, and therefore any recourse to defend themselves from AMLO’s army of tax collectors. A simple accounting mistake, or even creative but legal forms of mitigating income (admissible deductions, for instance), would be subject to the discretion of Mexico’s new tax inquisitors. Today, if this happens, people and companies have recourse for legal defense in court and are presumed innocent until proven guilty.
However, a recently approved asset forfeiture law allows the government to suspend presumption of innocence in the seizure of personal property for entities or individuals suspected of engaging in corruption or criminal activities characteristic of organized crime. Since AMLO’s proposal would include tax evasion under that definition, in response to even a simple accounting mistake the government could seize all assets of the now-presumed-guilty party, freeze bank accounts, assign an immediate jail term, and also have a claim to divest forfeited property at any price.
The enhanced asset forfeiture powers combined with the proposed crackdown on tax evasion constitute a blank check to investigate whomever or expropriate whatever. Sounds like corruption may not be going away after all.
Furthermore, it is exactly these types of policies that create the insecurity of property rights from which Mexico suffers. They contradict AMLO’s aim to “generate a climate that is friendly” to business and productive capital investment.
Not surprisingly, in the first ten months of the new government, gross fixed investment has declined by 10% year-to-year; economic growth has stopped; and rating agencies are increasingly worried that the country could lose its investment grade status.
Mexico critically needs a new agenda of pro-growth fiscal policies. Tax evasion can be reduced with the time-tested formula of simple rules for a complex world: low universal tax rates and a broad tax base with few loopholes. That would create a more transparent, easy to understand tax code, and would reduce opportunities for (and benefits from) corruption.
The current policy path achieves none of that and seems likely to do further harm to Mexico’s economy. Given our close trading relationship with them, the Texas economy could suffer as well.
Dean Stansel is an economist at the O’Neil Center for Global Markets and Freedom at Southern Methodist University. He wrote this column for The Dallas Morning News.