Over the last ten years, the need for sustainable tax revenues has become clear, in order to provide more public expenditures in areas such as, poverty alleviation, health, education, and infrastructure, as well as for payment of the recent social security reform, and banking sector support. The report examines the key problems in Mexico's tax, and revenue system, identifying administration as the weakest factor in its tax system, where such weakness has contributed to political resistance in broadening the tax base. In addition, the system relies heavily on oil revenues, only about thirty percent of the total, and dependent on world prices, thus, the rest of the economy will have to bear a larger tax burden as a share of GDP. Meanwhile, various exemptions, and special regimes erode the base of the most important taxes - Value Added Tax (VAT), corporate, and personal income taxes, and, most tax decisions, and the derived political consequences, continue at the national level, while the delivery of services is increasingly devolved to sub-national levels. Within the reform options, the most relevant fall in three areas: national tax policy, administration, and inter-governmental fiscal relations, where the central theme is to improve revenue capacity, efficiency, and horizontal equity of the system, by simplifying laws, eliminating exemptions, and facilitating compliance, and enforcement. Such reform strategy will be successful if implemented in a coordinated way, by reducing evasion, and improving collection
by the already implemented income tax reform (end of 2001), although the VAT and petroleum taxation remain on the agenda for future action
and, by the State cooperation in the tax reform program, to improve enforcement, particularly the VAT.