By Dave Graham and Alexandra Alper

MEXICO CITY (Reuters) - Mexico's government unveiled on Sunday a plan to increase taxes on higher income earners and levy a charge on stock market gains but shied away from widening a controversial sales tax amid an economic slowdown.

The proposed reform will also include a universal pension, unemployment insurance and other measures to help the poor, who account for nearly half of the population, as well as emergency spending that will force a budget deficit this year and next.

Applying the sales tax to food and medicine is a political hot potato in Mexico and its omission will dilute the impact of the reform because it was seen as one of the most effective ways of raising more revenue.

Avoiding that tax, which senior figures in the ruling Institutional Revolutionary Party (PRI) had until recently said looked almost certain, should help take the sting out of street protests by leftists who say it would be unfair on the millions of poor.

Much of the social burden for the reform appears to fall on the middle class, with the top rate of tax rising to 32 percent from 30 percent for those who earn more than 500,000 pesos ($37,800) a year, the reform document presented to Congress showed.

"All the initiatives which comprise the tax reform have the objective firstly of creating a universal social security system and secondly of ensuring we have a fairer, simpler and more transparent tax system," Finance Minister Luis Videgaray said, delivering his budget and the tax reform to Congress.

"Finally it has a third aim, which is to accelerate economic growth and job-creation," he added.

The reform details sparked immediate criticism from some members of the conservative National Action Party, which President Enrique Pena Nieto has been relying on for support to push through his economic agenda in Congress because his PRI lacks a majority.

"To put this rate on those earning 500,000 pesos is an attack on the middle class," said PAN Senator Francisco Dominguez, who sits on the Senate's finance committee, adding he would not in principle support the bill.

By contrast, the plan, which also includes measures to tax soft drinks, won some early support from Mexico's main leftist party.

The reform aims to increase Mexico's weak tax revenues by nearly 3 percent of gross domestic product (GDP) by 2018 - less than the 4 percent of GDP several senior officials in the PRI had said the government was originally targeting, according to a reform draft seen earlier by Reuters.

Pena Nieto also backed off from imposing much higher income tax rates on Mexico's richest, including Carlos Slim, who started this year as the world's richest man. The reform will keep the corporate tax rate at 30 percent, a lawmaker said.

Instead, following a surprise contraction in the economy during the April-June period, the government plans to deliver a short-term boost to growth with "emergency" spending which will cause a budget deficit this year and next.

The bill proposes a "transitory" deficit of 0.4 percent of GDP for 2013, and 1.5 percent of GDP in 2014.


Fiscal reform is one of the key planks of Pena Nieto's economic agenda, which aims to improve years of sluggish growth in Latin America's No. 2 economy.

The reform proposes imposing a 10 percent tax on stock market gains and dividends and eliminating some two-thirds of special tax breaks and exemptions. The shared border area with the United States will no longer enjoy a lower sales tax that was originally introduced to help spur trade.

Pena Nieto has pledged to lift growth to around 6 percent a year - up from an average of barely 2 percent since 2000 - by also opening up the oil sector to foreign capital, fomenting competition in major industries and improving education.

The reform proposes reducing the tax burden on state oil monopoly Pemex <PEMX.UL> to below 60 percent, from 79 percent, according to the reform draft.

That interlocks with a separate energy reform Pena Nieto has presented which seeks to lure foreign investment into the industry to help reverse a slide in crude production.

Mexico wants to wean itself off dependence on tax revenue from Pemex, which it currently relies on to fund around a third of the federal budget. Easing the crushing tax burden on the company should help it to compete better internationally, although it has also been hurt by inefficiencies.

Mexico has the lowest tax revenue in the 34-nation Organization for Economic Co-operation and Development (OECD), crimping its ability to spend on health, infrastructure and social programs vital to boosting living standards and growth.

Excluding revenues from Pemex, the total of taxes raised by the government was only 9.7 percent of GDP in 2012.


The government slashed its 2013 growth outlook to 1.8 percent last month after the economy shrank by 0.7 percent in the April-June period. That increased pressure on policymakers to hold back from any measures that could crimp demand.

The government also aims to levy so-called health taxes, including levies on fuels and soda pop, to combat obesity. It would also continue to erase fuel subsidies, and gasoline prices would rise in line with inflation from 2014.

Shortly after taking office in December, Pena Nieto forged a pact with the opposition to push for a range of reforms. It has helped him push major legislation to increase competition in the telecoms sector and improve education standards.

Pena Nieto is already grappling with protests by teachers opposed to tougher standards, causing friction between the PRI and the leftist Party of Democratic Revolution (PRD), whose leader Jesus Zambrano also signed the so-called Pact for Mexico.

Zambrano welcomed details of the tax reform on Sunday.

"It seems this would be a big step forward in re-directing the economic policy of Pena Nieto's government," he told Reuters. "It would mean paying heed to a fundamental part of the agreements contained within the Pact for Mexico."

The PRD is opposed to Pena Nieto's energy overhaul, arguing it plans to give away Mexico's oil wealth. But agreement on the tax plan could bring the two sides closer together, possibly smoothing the passage of the energy bill through Congress.

Still, Mexico's most well-known leftist, Andres Manuel Lopez Obrador, the runner-up to Pena Nieto in last year's election, has vowed protests against the reforms.

Thousands gathered at a rally led by Lopez Obrador in central Mexico City on Sunday, though the atmosphere was peaceful. In 2006, his protests over alleged electoral fraud paralyzed parts of Mexico City for weeks.

($1 = 13.2405 Mexican pesos)

(With reporting by Miguel Angel Gutierrez, Anahi Rama, Ana Isabel Martinez, Simon gardner, Michael O'Boyle and Gabriel Stargardter; Editing by Kieran Murray)