PRANAYAMA LA CIENCIA DE LA RESPIRACIÓN

The self-employed are treated by the system as individuals with business activities. This group would include people who work independently, like small business owners, independent professionals or workers under outsourced professional contracts with firms9. These groups of workers and their families would not be covered by the social insurance system because the legislation explicitly excludes them. In principle, the same tax schedule presented in table 11 would apply to them, including deductions of private spending on welfare services but without the tax subsidies that only apply to waged earners. (LISR, 2002). However, in 2012 two additional sets of rules would distinguish the treatment self-employed workers get:

 After 2007, all the self-employed should pay an additional tax called the single rate tax for businesses (IETU),

 After 2002, an important share of the self-employed could be eligible for the minor taxpayers’ regime (REPECOS).

The IETU consists of a flat rate tax applicable to all businesses and individuals with business activities. The rate in effect in 2012 was 17.5 per cent. Income Tax is deductible from the IETU,

9 _{This workers in principle are independent, in reality are under a subordinate relationship but without the benefits of} workers employed by firms, like social insurance (Negrete Prieto, 2012) .

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so the taxpayer only ends up paying whichever is higher between the two. Expenses related to business activities are deductible; but regarding spending on private welfare services, only contributions to private pension plans can be deduced (LIETU, 2007).

The REPECOS was part of the 2002 new income tax law. Not all the self-employed are eligible. The legislation establishes that only people whose activities are the sale of goods or the provision of services directly to the public up to a certain income threshold can join. Instead of paying the IETU and income tax, people registered as minor taxpayers pay a fee that replaces both taxes, depending on their earnings level, with no deductions allowed. (SHCP, 2008). The fees are different in each state; Table 14 shows the Federal District’s fees valid in 2012.

Table 14. Minor Taxpayers Regime Fees in Federal District (Mexico City), 2012

Lower Bound Upper Bound

Fixed Fee $ £ (PPP) 0.0 0.4 200 18 0.4 0.7 300 26 0.7 0.9 500 44 0.9 1.3 1,000 88 1.3 1.8 1,500 132 1.8 2.2 2,000 177 2.2 4.4 3,500 309 4.4 6.6 7,500 662 6.6 8.8 10,500 927 8.8 11.0 13,500 1,192 11.0 13.2 19,000 1,678 13.2 --- 35,000 3,090

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The rules of the minor taxpayers’ regime establish that only individuals selling goods or providing services directly to the public are eligible for the minor taxpayers’ regime. This means that not all independent workers can be accepted. More specifically, the interpretation of the rules means that only independent workers who do not give receipts that are tax deductible can be classified as minor taxpayers. The regime would then basically apply to small shop or workshop owners. Professionals who are under outsourced contracts with firms will not be accepted because they do not provide a service directly to the public, whilst independent professionals who may be providing services to the public would be excluded too because their receipts are tax deductible (SHCP, 2012).

5.3.3.2. Assumptions for the calculations of taxes for the self-employed

The following assumptions were made for the calculations of income tax for households with self-employed earners:

 Household earners were self-employed complying with all the income tax rules.

 None of these households would be paying social insurance contributions because the legislation excludes them from compulsory affiliation.

 Employment status and income level remained the same throughout the year.

 Household composition consisted of a couple and two children, one in primary school; the results would be the same for other compositions.

 The same assumptions on private welfare spending previously made for households with waged earners were made for these households models.

 No deductions associated to business activities were considered.

5.3.3.3. Effects of income taxes for the self-employed

Changes on the tax structure would have contrasting effects depending if the earner was eligible for the minor taxpayers’ regime or not. Figure 18 compares the percentage of variation in disposable income after the payment of contributions and taxes in 1994 and in 2012. Three different calculations are displayed for 2012: after subtracting only income tax (ISR), after income tax and the single rate tax (IETU), and after applying the rules of the minor taxpayers’ regime. As can be observed, if only income tax was applied in 2012, disposable income would

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be lower than in 1994 for all earnings levels, but much lower at 25 times the minimum wage, reflecting a more progressive structure in the income tax schedule. Nonetheless, the effects change significantly when the other two taxes are added.

Figure 19. Variation between Disposable Income after Contributions and Taxes and Original Earnings, Self-employed, 3 Income Tax Scenarios, 1994 and 2012 (percentage)

Source: Own calculations.

The IETU is highly regressive and it would be especially unfavourable to low and middle income households. For the affected households the application of the single rate of 17.5 per cent results in a higher amount than the amount of income tax, so they would end up paying the former instead of the latter. For families with original earnings equivalent to one minimum wage, this would represent a reduction of 14 percentage points in their disposable income compared to 1994, whilst for families with earnings of five times the minimum wage, of close to 10 percentage points. At the top income level, income tax would be higher than the IETU so they would pay the former.

For low and middle income workers that were eligible to the minor taxpayers’ regime, disposable income would remain at similar levels compared to 1994; low income workers would

-3.5 -4.5 -17.5 -4.4 -7.4 -9.5 -17.5 -6.6 -12.0 -21.4 -21.4 -6.2 -25.0 -20.0 -15.0 -10.0 -5.0 - 1994 2012 income tax 2012 IETU 2012 minor taxpayers 1 MW 5 x MW 25 x MW

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have to pay slightly more, but high income families would result to be greatly benefited. At original earnings of one minimum wage, households would actually be paying more in 2012 than in 1994, from 3.5 to 4.4 per cent of their original income; at five times the minimum wage slightly less, from 7.4 to 6.6 per cent; but at 25 times the minimum wage, the amount paid would be cut in half, from 12 to 6.2 per cent.

The tax changes affected groups of households with self-employed earners in different ways. In the case of households with earners who were able to be classified as minor taxpayers, the new regime was greatly beneficial, as long as they belonged to middle and high income groups. In the case of households with earners that do not meet the requirements to join the minor taxpayers’ regime, the IETU would strongly affect the disposable income of the low and middle income ones, cancelling the progressivity of the tax changes observable for households with waged earners. In any case, it seems that low income families with self-employed earners appear to come out as losers of the reforms.