Multilevel fiscal institutions and mechanisms for reducing tax cheating: The case of Mexico

Many countries are tempted to copy fiscal multi-level organisations and institutions that operate in the more advanced OECD countries, and they are often recommended by international organisations regardless of the type of economy under consideration. This generally overlooks the context under which the institutions have evolved and function. A case in point is the segmentation of tax administrations for the implementation of the income tax in the United States that was replicated in Mexico for both the income tax as well as the value-added tax. Firms with a relatively high threshold of MXN 2 million were assigned to the states, which had very few incentives to collect the taxes, but provided a “shelter” that generated a large “informal” sector that thrived around “cheating and avoidance” including by larger firms. Recent theoretical research also assumed that the large taxpayers are honest, and therefore recommended increasing the threshold. The Mexican 2013 fiscal reforms, however, eliminated the threshold and closed the “informality” channels used by medium-sized and large taxpayers. The full VAT chain was instrumental in providing information to “close the income tax gaps” and facilitating the removal of measures that add to the costs of doing business. Consequently, the design of appropriate institutions should closely reflect the context in which they are being introduced.