The SAT, VAT, Income Tax, and Public Debt
Ximena gets her first paycheck from a part-time job and is surprised: they deposited less than what she agreed to. That same day she buys a pair of headphones and the receipt shows an extra charge. Who keeps that difference, what is it spent on, and what happens when the government spends more than it collects? That is public finance.
The SAT and What Taxes Are For
The SAT (Servicio de Administración Tributaria, Mexico's tax administration service) is the agency that collects federal taxes in Mexico. It reports to the SHCP (Secretaría de Hacienda y Crédito Público, the Ministry of Finance and Public Credit), which designs the budget and decides how it is distributed.
Taxes are mandatory payments to the State. They fund public education, the IMSS and ISSSTE hospitals, roads, security, drinking water, and social programs. Without revenue, the government could not provide these public goods and services.
Two taxes are the most visible to you:
| Tax | What it taxes | Where you see it |
|---|---|---|
| VAT (value-added tax, called IVA in Mexico) | Consumption: the purchase of goods and services | On the purchase receipt |
| Income tax (ISR) | Income: wages, company profits | On the pay stub |
a) Explain what the IVA (Value Added Tax) and the ISR (Income Tax) are levied on. b) Classify: which tax shows up on the receipt when you buy a cellphone, and which one…
- a) Explain what the IVA (Value Added Tax) and the ISR (Income Tax) are levied on.
- b) Classify: which tax shows up on the receipt when you buy a cellphone, and which one is withheld from a formal worker's payroll?
- c) Name two public services funded with the taxes collected by the SAT.
VAT: A Percentage on the Price
The general VAT rate in Mexico is $16\%$ (in the northern border zone it is $8\%$). The merchant collects it, but the consumer pays it, and the merchant turns it over to the SAT.
Why: paying the price plus $16\%$ is the same as paying $116\%$ of the base price, that is, multiplying by $1.16$. To undo it, you divide by $1.16$.
In Mexico the general VAT rate is $16\%$. a) A TV set is priced at $\$8,500.00…
In Mexico the general VAT rate is $16\%$.
- a) A TV set is priced at $\$8,500.00$ before taxes. Compute the VAT and the final price the customer pays.
- b) A supermarket receipt shows a total of $\$1,160.00$ with VAT already included. Compute the price before VAT and the tax amount. (Hint: the total is $116\%$ of the base price.)
Income Tax: A Progressive Tax by Brackets
The income tax (ISR) taxes the income of individuals and the profits of companies. For individuals it is progressive: people who earn more pay a higher rate, and each rate is applied only to the part of the income that falls within its bracket. The goal is that those with more ability to pay contribute proportionally more.
We will use this simplified table (hypothetical, not the SAT's actual rate schedule):
| Monthly income bracket | Rate |
|---|---|
| Up to $\$10{,}000.00$ | $10\%$ |
| From $\$10{,}000.01$ to $\$20{,}000.00$ | $15\%$ |
| Over $\$20{,}000.00$ | $20\%$ |
The effective rate always falls between the lowest rate and the top-bracket rate, because the first pesos are taxed at lower rates.
The ISR is a progressive tax: those who earn more pay a higher rate. Use this simplified (hypothetical) table for a monthly income: | Monthly income bracket | Rate | |…
The ISR is a progressive tax: those who earn more pay a higher rate. Use this simplified (hypothetical) table for a monthly income:
| Monthly income bracket | Rate |
|---|---|
| Up to $\$10,000.00$ | $10\%$ |
| From $\$10,000.01$ to $\$20,000.00$ | $15\%$ |
| Over $\$20,000.00$ | $20\%$ |
Each rate applies only to the part of the income that falls inside the bracket.
- a) Compute the ISR for a person who earns $\$30,000.00$ a month, bracket by bracket.
- b) Compute their effective rate (total tax divided by income, as a percentage) and compare it with the rate of the highest bracket.
Deficit and Public Debt
When the government spends more than it collects, there is a public deficit. To cover it, the government borrows, and those accumulated loans make up the public debt.
An analogy: if every month you spend $\$200$ more than you receive and cover it with loans, your deficit is $\$200$ per month and your debt is the sum of everything you have borrowed.
The government finances itself by issuing Cetes (Mexican Treasury certificates) and government bonds. Debt can be domestic (owed to creditors inside the country, in pesos) or external (owed to creditors abroad, often in dollars).
Since countries have economies of very different sizes, debt is compared as a percentage of GDP: $\text{debt} = \text{percentage} \times \text{GDP}$.
The Cost of Debt: Interest
Debt is not free: the government pays interest. The annual spending on interest is
$$\text{interest} = \text{debt} \times \text{interest rate}.$$That extra money can no longer be used for something else. If revenue does not grow, the government must cut other budget items (infrastructure investment, health, education, social programs), raise taxes, or borrow even more. That is why, when rates go up, the budget gets squeezed.
When the government spends more than it collects there is a public deficit, and that deficit is financed by issuing debt. a) Explain the difference between deficit and…
When the government spends more than it collects there is a public deficit, and that deficit is financed by issuing debt.
- a) Explain the difference between deficit and public debt.
- b) Debt is usually measured as a percentage of GDP. If a country's debt is $50\%$ of its GDP and GDP is $25$ trillion pesos, how large is the debt?
- c) Suppose the interest rate the government pays rises from $8\%$ to $10\%$ per year. Compute how the annual interest spending on that debt changes and explain what it means for the budget: which items might get cut?