Attention, Mexican Shoppers: Price Drops Likely Because of End to One-Party Rule

A new Congress without PRI dominance may cut value-added tax when its session begins Sept. 1.

Taking a break from the school shopping he's doing for his six children, Delfino Alvarz winces at the 460 pesos - about $60 - he just plunked down on three pairs of children's tennis shoes. But he turns irate when he thinks that $8 of the price tag went to Mexico's unpopular 15 percent value-added tax.

"If they reduced the VAT to [10 percent] where it used to be, that would have left 20 pesos of this purchase in my pocket," says the Mexico City carpenter. "Twenty pesos is nothing to a corrupt and wasteful government. But for struggling people like us, 20 pesos matters a lot."

Mr. Alvarz is offering his two cents' worth to a raging national debate over whether Mexico should reduce its VAT, which was hiked up 50 percent in 1995. The increase was a major element of the emergency economic plan that followed the peso's disastrous devaluations of December 1994 and 1995.

What makes the debate interesting is that it is happening at all. Until July 6, when Mexican voters ended the ruling Institutional Revolutionary Party's (PRI) virtual monopoly on power, such a debate would have had little real importance. For example, in 1995 with the emergency economic legislation, the PRI president presented plans, and the PRI-ruled Congress rubber-stamped them. End of discussion.

But in the new Congress that takes office Sept. 1, the PRI will be in the minority in the lower house. The five opposition parties last week announced an "alliance" to work together on issues of mutual importance, with one of those being a reduction in the value-added tax.

Thus the VAT debate is the first practical signal that something really did change in Mexico with July's elections. And the high-pitched commentary coming from all sides indicates that everyone from those at the presidential palace on down knows it.

Mexican President Ernesto Zedillo defends the higher VAT as a central pillar of Mexico's continuing economic turnaround, although he supports a long-term overhaul of the country's public-financing system.

Mexico's economic officials warn that reducing the VAT would be a windfall to the rich, since they consume more, while robbing the poor through unavoidable reductions in government programs. One PRI congressman said recently that reducing the VAT to 10 percent now would wreak such havoc as to make the 1994-95 crisis look like "child's play."

But the opposition remains unswayed. "President Zedillo himself says we've pulled out of the crisis, so if the emergency is over, we should be able to rescind the measures taken to address it," says Ricardo Ling Altamirano, a National Action Party senator from the state of Guanajuato.

As for claims that lowering the VAT would hurt the poor most, Mr. Ling calls such arguments "clear threats from some of the president's administrators to push the opposition up against a wall." Besides, the money raised with the VAT increase did not go into social spending, he says, but was used to prop up Mexico's teetering banking system.

He and much of the opposition argue that with Mexico running a budget surplus, it is time to give back something to average Mexicans, who were hard hit by the country's worst economic downturn in 60 years. Many economists argue that internal demand remains the weak spot of the economy. And the way to reach everybody with a tax cut, Ling says, is through the VAT.

And while some economists warn against playing with a recovering economy's financial underpinnings, others insist Mexico could lower the VAT with no harm done. "It wouldn't cause any immediate problems to lower the VAT," says Jess Estban Macas, director of the graduate program in finance at Technolgico de Monterrey in Mexico City. He says Mexico is attracting enough foreign investment to make a cut possible.

Mr. Esteban, who favors lowering the VAT to 8 or 9 percent, says that it should be done gradually, to allow public finance reform to address corruption and inefficiencies, and thus make up for falling revenues.

Yet while politicians and economists are split over the wisdom of a VAT cut, the public is more one-sided. A few, like Mexico City lawyer Estela Rodrguez Botello, worry that a tax cut now would undermine Mexico's recovery. "This is a good flag for the opposition to wave, but I'm not sure it's good economics," she says.

But most are unequivocal in their support. "This would help people who are really hurting, and it would force the government to be more intelligent with its resources," says Gerardo Lpez, general director of EASA, a Mexico City auto stamping company.

What everyone from Zedillo to Mr. Lpez agree on is that Mexico needs a major overhaul of its public financing system: to make it fairer, more competitive with trading partners (many Mexicans pay more taxes than Americans of similar income), and less corrupt.

But like many other issues that will follow the VAT debate, such a major endeavor is likely to be messier now that it's not just the president and his PRI doing the overhauling.

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