The Mexico Summit Jude Wanniski January 14, 2004

Memo To: Vicente Fox, President of Mexico
From: Jude Wanniski
Re: Exporting Your Citizens

Having had such high hopes for your tenure when you were elected in 1999, Mr. President, I am sorely dismayed that your economy remains in such sad shape that you have to negotiate with our President to send your unemployed to work here illegally. Nothing I saw in your meeting with President Bush indicates you are getting any closer to figuring out that as long as your tax system is so out of line with the US tax system, you will continue to export your people into the American Southwest and California. They are not leaving in search of lower tax rates, mind you. It is just that Mexico’s business class cannot form the capital necessary to sustain broader employment of your people at living wages.

As far as I can tell, your top income tax rate of 33% now applies at an income of about $20,000. In the U.S., the top rate is 38.6%, but that is not encountered until taxable income reaches $312,000. Your 25% rate is reached at $7230 and the closest U.S. tax bracket for a head of household of 27% is reached at $98,000. Your 10% rate is reached at $4114. The U.S. 10% rate is encountered at $10,000. Do you see what I mean?

Then there is your 15% Value Added Tax, which adds to the burdens of enterprise, a tax that the United States does not have at all.

If you check with your finance minister, Francisco Gil Diaz, he will tell you that I have been pestering him for the last four years to cut or eliminate your capital gains tax. There is a zero capital gains tax on shares traded on your stock exchange, I know, but you have to be a big company to trade on the Bolsa. If you are not big enough to be admitted to the Bolsa, you must pay capital gains at the ordinary rates. In other words, the system favors the elites and punishes the pool out of which you would expect to find entrepreneurs who someday might become big enough to compete with the elites. If you would eliminate the capgains tax, which I’m sure you will find brings in very little revenue to your government. This is because it encourages businesses to remain small or to find ways to avoid the tax. You would immediately find the Mexico stock market surging ahead, not because the elites would get a more favorable treatment than zero, but because the economy underneath them would be pushing up the value of all assets. Revenues would then increase dramatically on your income tax and your VAT tax, and you could then easily make provision to lower the burden of the VAT and income tax. I’d recommend you leave the top rate in place at 33% and increase the threshold to at least $100,000.

There are a great many other things you can do to catch up with the United States in the way you originally envisioned, President Fox. But this would be a good start. What you would find, even if you presented such a program to the legislature, that there would immediately be a hesitation of your citizens to leave the U.S., and in a short time there would be a reflow of Mexican nationals who are now struggling to make ends meet in California and the other Southwestern states.

Monetary policy is also something to consider, although here Minister gil Diaz has done a better job in stabilizing the value of the peso. You are always at risk, though, because of the floating U.S. dollar. Here is a memo I wrote to Paco Gil on July 23, 2001, “Those Unhappy Mexican Farmers.” It was written when your economy was suffering terribly from the monetary deflation caused by the Federal Reserve’s management of the floating dollar.

With best wishes for the remainder of your six-year term,

Jude Wanniski