| MEXICO CITY
MEXICO CITY Mexico's government is primed to water down parts of a proposed tax overhaul that aims to boost the country's low tax receipts, and may lean on the country's richest to help make up the shortfall.
President Enrique Pena Nieto hopes to raise Mexico's anaemic tax revenues by around $35 billion (21.9 billion pounds) by 2018, but political opposition and intense lobbying by business groups mean sections of his reform will be sacrificed to push it through Congress.
Last month he proposed raising taxes for higher earners, putting a levy on stock market gains and boosting social programs to help the poor, but shied away from widening a controversial sales tax amid an economic slowdown.
The government is ready to revise unpopular levies on private schooling and mortgages, said Cesar Camacho, chairman of the ruling Institutional Revolutionary Party (PRI).
"The PRI is ready to carry out a series of adjustments so that the fiscal reform can prosper," Camacho said. "We PRI members agreed ... to push through adjustments to sales tax on schooling, on mortgage interest payments and housing rent."
"This reform is not only necessary, it is also urgent and cannot be delayed," he added. Camacho did not say how the government would offset lost revenue.
Senior lawmakers involved in the talks say a planned carbon tax is also among the items due to be cut or pared back.
Pena Nieto's tax plan has already fallen short of expectations, after he opted out of measures such as applying sales tax to food and medicine that could have broadened the tax take in Latin America's No. 2 economy.
If efforts to push the bill through founder, it will curb the government's spending plans and could complicate other legislation, notably a bill to open up the country's state-run oil industry to private capital that requires significant support from opposition benches.
To compensate for reductions in the fiscal reform, various ideas have been floated, including imposing a higher top rate of tax and raising more money from stock market transactions.
Income tax is currently capped at 30 percent but the reform would levy a top rate of income tax of 32 percent on people earning over 500,000 pesos (23,752 pounds) a year. The proposed reform also intends to charge a 10 percent rate on capital gains and dividends on the stock market.
Applying a higher income tax rate on those earning 1,000,000 pesos or more has been floated, and Manlio Fabio Beltrones, the PRI's leader in the lower house, said potential changes to the top rate were on the table.
"There are concerns about putting people paying 32 percent above 43,000 pesos a month on the same level as someone earning millions of pesos," Beltrones said on Tuesday. "We're looking at a formula so that there is more progressiveness."
The president has attached the reform to the 2014 budget, which must be approved by mid-November, and the PRI needs to cut a deal to pass the bill because it has no majority in Congress.
The lower house must approve the bill by October 20, and expects to start voting on it next week.
The fiscal reform has created an awkward political balancing act for Pena Nieto. The smorgasbord of measures seeks to eliminate tax breaks and loopholes while raising taxes on everything from the rich to dog food and sugary drinks.
Upon taking office in December, he sealed a pact with opposition parties to work together on reforms. But the fiscal plan and an energy bill presented in August have shown the limits to which the pact will stretch.
The centre-left Party of Democratic Revolution, or PRD, baulked at Pena Nieto's plans to offer profit-sharing contracts to oil majors to open up the oil industry.
The conservative National Action Party (PAN) cried foul last month over the fiscal plan, arguing it would soak businesses and existing taxpayers without trying to resolve the issue of taxing the millions of informal workers in Mexico.
"Year in, year out, the formal sector paying taxes is getting smaller," said Mario Sanchez, a PAN lawmaker who chairs the economics committee in the Lower House. "(Finding) more money means those who don't pay now. There's a huge universe in which to look. And we have to look."
Pena Nieto is counting on PAN votes to push through his oil industry reform, which proposes constitutional changes requiring a two thirds majority in Congress. The fiscal package, by contrast, has been supported more heavily by the PRD.
After the economy suffered a surprise contraction in the second quarter and teachers launched disruptive protests over a new education law, the government backed out of widening sales tax, fearing it could stir up trouble among the poor.
PRI lawmakers are conscious of the gap the lack of extra sales tax revenues will leave in the accounts of Mexico. Hector Garcia, a PRI congressman, said the government had not been aggressive enough in communicating the need to find more money.
"We're going to be well short," he said.
(Editing by Simon Gardner; Editing by Tim Dobbyn and Diane Craft)