Over the last ten years, the need forsustainable tax revenues has become clear, in order toprovide more public expenditures in areas such as, povertyalleviation, health, education, and infrastructure, as wellas for payment of the recent social security reform, andbanking sector support. The report examines the key problemsin Mexico's tax, and revenue system, identifyingadministration as the weakest factor in its tax system,where such weakness has contributed to political resistancein broadening the tax base. In addition, the system reliesheavily on oil revenues, only about thirty percent of thetotal, and dependent on world prices, thus, the rest of theeconomy will have to bear a larger tax burden as a share ofGDP. Meanwhile, various exemptions, and special regimeserode the base of the most important taxes - Value Added Tax(VAT), corporate, and personal income taxes, and, most taxdecisions, and the derived political consequences, continueat the national level, while the delivery of services isincreasingly devolved to sub-national levels. Within thereform options, the most relevant fall in three areas:national tax policy, administration, and inter-governmentalfiscal relations, where the central theme is to improverevenue capacity, efficiency, and horizontal equity of thesystem, by simplifying laws, eliminating exemptions, andfacilitating compliance, and enforcement. Such reformstrategy will be successful if implemented in a coordinatedway, by reducing evasion, and improving collection; by thealready implemented income tax reform (end of 2001),although the VAT and petroleum taxation remain on the agendafor future action; and, by the State cooperation in the taxreform program, to improve enforcement, particularly the VAT.
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