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Mexico Aims to Bring Shadow Economy Into the Light

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June 27, 2013

Six in 10 Mexican workers, or 30 million people, live in Mexico's informal economy, eroding the country's already-low tax base and hindering plans to set up a universal social security system.

Mexico City, Mexico - Seeking to dismantle a black economy dragging on economic growth, Mexico wants to lure informal workers into the social security net - and the reach of the tax man.

Six in 10 Mexican workers, or 30 million people, live in the country's informal economy, eroding Mexico's already-low tax base and hindering plans to set up a universal social security system.

"The country loses 3 or 4 percentage points of GDP every year because 60 percent of its workers don't generate any taxes and also don't have social security benefits," Labor Minister Alfonso Navarrete said on Tuesday.

"If there are no real incentives to make it attractive for informal workers to turn formal ... it's difficult to get this group to migrate."

Navarrete said the new program would get government and employers working with Mexico's powerful labor unions to bring workers into the formal fold and give them access to mortgage and lending programs set up for workers.

The initiative, to be launched in July, will complement fiscal reforms due for presentation in September which aim to boost Mexico's tax collection from a meager 9.7 percent of GDP and crack down on loopholes and tax evasion.

Tax reform, along with an overhaul of the state-dominated energy sector, is a key plank of the reform agenda promised by President Enrique Pena Nieto, whose plans to boost growth to 6 percent a year have captured the imagination of investors.

Carlos Cardenas, president of The Mexican Institute of Chartered Public Accountants, estimates that taxing informal workers would raise the total tax take by 3 percentage points - about half the total tax take increase that experts say is needed.

"It's a growing problem ... If we don't do anything, in a year we will be talking about 65 percent of workers, not 60 percent," he told Reuters earlier this year.

But senior finance ministry official Miguel Messmacher, charged with coordinating the hotly anticipated fiscal reform, said taxation policy can only do so much.

Messmacher, who maintains all options are still open on the fiscal reform, said 60 percent of informal workers lived out in the country or in smaller towns and villages with few formal job opportunities.

"These people work in agriculture or in very small mom-and-pop type enterprises," he said in an interview in his Mexico City office last week.

Another 20 percent are self-employed professionals and the remaining 20 percent are the public face of the black economy, making a living from market stalls, selling chewing gum at traffic lights or as domestic staff.

"That's where tinkering a little bit with the tax structure and the social security contributions can help," Messmacher said, declining to give any details of the planned reform.

"We're analyzing all the different options and we haven't made any choices yet," he said, quizzed about a higher rate for top earners, taxes on capital gains and financial transactions, and lowering the corporate tax rate from the current 30 percent.

Tax loopholes and exemptions, which he said had a net cost of about 3 percent of GDP, were also in the firing line.

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