To grow and create jobs, business needs government to be reasonable.
Gov. Bill Richardson and other governors in the Southwestern United States can help our neighbors in Mexico understand that concept when they attend the Border Governors Conference scheduled Aug. 9-10 in Santa Fe.
The conference involves the governors of the states on both sides of the border. We hope they use the next six months to plan ways to use the conference as a platform to encourage Mexico to embrace reform.
A good start would be to understand the punishing tax system in Mexico. It’s no wonder businesses and individuals there feel limited incentive to save or invest, given the results of a study by economist Jude Wanniski. He helped design Ronald Reagan’s 1981 tax cuts and now heads Polyconomics Inc., an economic consulting firm in New Jersey.
Here are the contrasts he found:
Top income tax rate: In Mexico, 33 percent; in the United States, 35 percent.
Level at which the top income tax rate kicks in: $20,000 in Mexico, $312,000 in the United States. This is a crucial number because it shows that the highest income tax rate begins hitting much lower, at the middle-class level in Mexico, but only at the upper-class level in the United States.
Typical middle-income tax rate: In Mexico, the 25 percent rate kicks in at $7,230, a low level. In the United States, our roughly equivalent tax rate of 27 percent kicks in at $98,000, more than 10 times higher, allowing many more people to save and invest.
Low tax rate: In Mexico, the 10 percent rate hits someone making just $4,114, but in the United States the 10 percent rate hits at $10,000.
Value added tax, which taxes the value added to something at each stage of production: Mexico has one of 15 percent. The United States does not have this tax.
Capital gains tax: The rate in Mexico is zero for shares traded on the Bolsa stock exchange. But for other capital gains — such as on the sale of a small company — the top rate is a staggering 33 percent. The U.S. capital gains rate is 15 percent.
“The (Mexican) government gets little revenue on cap gains because the taxation on entrepreneurial capitalism is so high that small businessmen only grow so much and then stop,” Wanniski said.
“They usually stop (growing) when they run out of trusted family members, who won’t blab to the government about tax avoidance.
“What kills Mexico is the combination of various tax rates on labor and on capital and the inflation bias because of the tendency to devalue the peso whenever there is any difficulty in the economy.”
Put another way, Mexico has a long-term version of the stagflation that burned the U.S. economy in the 1970s. What it needs is Ronald Reagan-style tax cuts, to encourage business formation, job creation, saving and investment.
If Mexico got its economic house in order, it would provide more jobs for its own people and relieve the pressure of Mexicans seeking work in the United States.
Whatever one’s position on immigration, improving Mexico’s economy for its work force is a good idea and something our governors should advance.