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Read my lips, Vicente Fox

Posted By Jude Wanniski On 10/25/2000 @ 1:00 am In Commentary | Comments Disabled

To: My Mexican friends

From: Jude Wanniski

Re: Digging out of a foxhole

I can’t begin to tell you how depressed I get when I read dispatches
out of Mexico City about Vicente Fox and his fiscal plans. I think he
needs some words of advice from his good friends well before his Dec. 1
inauguration as President of Mexico, which is why I’m sending you this
missive. The Bolsa — your stock market in Mexico City — had done so
well in anticipation of his election, because I think it anticipated a
change for the better, especially on taxation. From all we could see at


Polyconomics,
not only during the course of the campaign, but also from his first victory as governor of Guanajuato, he seemed to understand the dynamics of supply-side economics. Some of you contacted me in the course of the campaign and immediately thereafter assured me that Vicente was going to get the country moving again and would surely be cutting tax rates to do it.

Alas, as in so many other cases we’ve seen throughout history, as soon as he was elected, he forgot about cutting taxes for growth and began planning for tax increases and austerity. In 1992, Bill Clinton promised a middle-class tax cut if elected and almost immediately announced that he would have to raise taxes instead. The Democrats lost Congress in 1994 over that blunder, but then blundered themselves by promoting spending austerity. A non-inflationary Greenspan Federal Reserve and the GOP tax cuts of 1997 produced the boom, although he still thinks it was tax increases that did it. Likewise, in 1988, we had President Bush swear an oath, “Read my lips, no new taxes,” and after just one year, he succumbed to demands for a tax increase that produced the recession that cost him re-election.

I shudder when I think of Richard Nixon running against the Vietnam war tax in 1968, getting elected and then raising the capital gains tax instead. That incredibly bad move led step by step to the end of the gold standard, to runaway inflation, plus the collapse of the stock market, the erosion of the economy and Nixon’s impeachment. (I still think Nixon would have survived if the economy were expanding at the time.)

Are you wondering why your stock market, the Bolsa, is down 25 percent in dollar terms from its peak at his election this summer? The Bolsa in itself is forecasting a slower economy path that will yield lower revenues. Fox no doubt thinks he is being courageous in proposing bitter medicine when he is doing worse than Zedillo and the PRI.

Of course, it is not too late to turn him around. I saw recently in the Wall Street Journal a story about his plan to extend the 15 percent VAT to food and medicine. Fox has got it in his head that a consumption tax is a good tax. Nobody has told him about the wedge model. Yes, he talks about collecting so much revenue from it that he can eventually bring marginal income tax rates down. This is not Ronald Reagan. It is Richard Nixon and Gerald R. Ford at their worst.

I know you folks have been doing your best to make him feel good about the six years ahead of him, telling him what a wonderful fellow he is, but he needs more than a pat on the back from you. Tax rates in Mexico are holding back the population and piling on more will hold the people back even more. He will blow a golden opportunity to get Mexico on the fast growth track on which it belongs.

There are plenty of things I’d recommend, but most definitely he should be eliminating the capital gains tax on ordinary people, which he can probably do by executive order. Nobody can accuse him of doing so in order to benefit the rich, because the rich in Mexico have already made sure they pay no capital gains tax on their Bolsa gains, while every little entrepreneur has to face rates the same as ordinary income. That move alone would get the Bolsa on the move again, with the bond market also gaining as bondholders realize the entire economy will be getting bigger, not smaller.

Forget extending the VAT, even with a complex system of rebates for the lower incomes. It will cost you more to administer the tax than it collects. Indeed, if Mexico is to ever grow fast enough to catch up with the United States, it has to begin thinking of getting rid of the VAT, which punishes new growth. One of the reasons the U.S. economy is the envy of the world is the resistance of our people to such a system that burdens not the big guys, but the entrepreneurs. As it is, Fox seems to be putting Mexico on a path that will cause it to fall even further behind.

If he does not hear this from his friends, who else will tell him?


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