The Mexican Supreme Court of Justice upheld the constitutionality of the country’s flat tax (IETU, Impuesto Empresarial a Tasa Unica) this month. Mexico implemented a national flat tax two years ago in order to create a system with a broader tax base and that would be easier to enforce, which would supposedly result in higher revenues. The 17.5% tax on goods, services, and transfers of rights-to-property replaced an asset tax in early 2008.
About 40,000 businesses affected by the IETU joined a suit challenging the law. Unlike other taxes, like the national rent tax (impuesto sobre la renta), this one lacks major deductions. As in all countries, deductions are often included to help certain businesses (such as new firms, those hiring new workers, or those providing health insurance benefits) more than others and therefore level the playing field. Some beneficial deductions not included in the IETU are those for royalty payments, credit payments, payroll taxes, and benefits for workers. Taking these away can have serious consequences for small businesses and is one reason why a pure flat tax has not been implemented in the United States.
In sum, this tax affects people differently even though it appears to treat everyone the same at first glance. For this reason, the appellants argued that the IETU violates the principle of proportional and equitable taxation embodied in the Mexico’s constitution. However, the Supreme Court dismissed these claims and upheld the law.