Friday, March 12, 2010

Slim (non-) taxes in Mexico contribute to disaster

Mexico is in quite a mess. Just look at its drugs war. And yet we now learn from the Forbes rich list that Carlos Slim, the world's richest man (again), is a Mexican.

We'd like to point out a couple of things here. How did Mr. Slim get to be the world's richest man? The Wall St. Journal sums it up, in a nutshell:

Carlos Slim is Mexico's Mr. Monopoly.
. . .
In all, his companies account for more than a third of the total value of Mexico's leading stock market index, while his fortune represents 7% of the country's annual economic output. (At his height, John D. Rockefeller's wealth was equal to 2.5% of U.S. gross domestic product.)

Ignoring the fact that a fortune cannot "represent" a share of a country's output - although it can be equivalent to it -- what people earn when they are in a monopolistic position (Slim controls a huge share of the country's telecoms market, for example) is unfair and unproductive rents. Economic rents are the unearned income of the man who, in the words of Adam Smith, "loves to reap where he did not sow." These rents are the kinds of easy, lazy dollars that spout into rulers' pockets from oil wells, and so on. (We blogged on a different form of rents recently, here.)

Because rents do not do anything to increase productivity, or enhance efficiency or lower prices (monopolistic practices are particularly important here) then it is an extremely good idea to tax them. Among other things, a failure to tax monopolistic rents helps instil a sense in a country that the rulers are above the law, and that it's therefore OK to dodge the law yourself - by, say, starting or participating in a drugs war.

And how does Mexico fare on a tax scale? Well, here are a couple of anecdotal comments:

"Economist Gary Hufbauer of the Institute for International Economics has remarked, "It's up to Mexico to solve its problem, and basically the wealthy classes do not want to tax themselves, period. While I'm not usually an advocate for larger government, Mexico is a country where public investment, done wisely, could pay huge dividends."


Mexico raises less revenue through taxation than nearly any other Latin American country, just 12 percent which is one reason why the nation's wealth is not better utilized. By comparison, the United States takes in 25-28 percent of its gross domestic profit in taxes. Even Brazil taxes itself at twice the Mexican rate. (For more details on tax in Latin America, click here.)

What a surprise that Mexico is in a mess.


Blogger Physiocrat said...

Good analysis. Rent grabbing is what this is about, ie taking the wealth that other people have created.

5:05 pm  

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