The taxman sleepeth: Bureaucratic mess hampers efforts to improve collection rates.

Accountant Martha Juarez makes a living helping people through the Mexican tax maze. This year she has an extra problem--better-trained and more honest officials are refusing to let some people pay because they haven't had the necessary home visit.

"I have a lot of clients this has happened to. They work and they aren't at home so they can't pay their taxes," she said. The Tax Administration System (SAT) acknowledges the problem but says it is a sign of progress-a new breed of inspector is being more thorough and is less likely to take a bribe. And the home visits, in which inspectors verify taxpayers live at their listed residence, are necessary to fight fraud. Still, it means they're collecting less in taxes than they could.

Finance Secretary Francisco Gil Diaz, who won the nickname the Iron Taxman for his work at the tax office in the '90s, is taking two steps forward and one step back as he struggles to drag a tax system designed for colonial Mexico into the 21st century.

President Fox is depending on him to increase public revenues to give him more to spend on the poor, who make up about half of the Mexican population. Juarez's problem is just an example of how hard it is to change the course of a federal secretariat, no matter how well-intentioned the people at the top.

And the system is improving slowly with modern offices and a growing culture of customer service that was absent in the past; but the monolithic system still depends on its employees, some of whom barely made it through elementary school.

"They have improved customer service but not training. Many of them don't know the law and when you ask a question they don't even know who to refer you to," said Juarez.

AT LEAST WE'RE NOT IN CONGO

Mexico is terrible at collecting taxes even by Third World standards. World Bank figures from 1999 show Mexico with a tax collection rate of 14% of gross domestic product, below the 20% average for Latin America and just over half the 25% rate for Brazil. It is also worse than Pakistan and Peru but better than the Democratic Republic of the Congo that has a rate of 0.1 percent.

Efforts to boost collection are working, albeit slowly. Last year, Mexico's tax income rose 4% and now accounts for 16% of gross domestic product, according to the Finance Secretariat. However, there is still a long way to go just to catch up to Brazil.

Due to political opposition, the government has abandoned the quick fix idea of slapping VAT on food and medicine, a tax most countries worldwide have in place. Now it is relying on more mundane strategies such as improving collection rates, but here the challenges can be as formidable as the opposition parties in Congress.

The SAT is spending more time training its people and trying to recruit a better class of officials. For example, only university graduates now do the work of inspectors who visit people at home and they are held to strict productivity standards and are fired at the first hint of corruption. Before it was a low-level job.

The SAT also points to weekly meetings at its 66 offices around the country to discuss the week's mistakes at which people are reprimanded or even fired, as evidence it is working to improve. Staff at customer service centers also get updates and training in the mornings before the service centers open at 9 a.m.

And there are results. There used to be an error rate of 8% in the customer service departments, which meant almost one in ten people had to resubmit their paperwork. This is now down to 2%.

TAKING PRIDE IN THE JOB

This can only take the service so far, though, in getting in line with international standards. In most developed countries, there is a trained staff in place with job security, career development and decent salaries as motivation. Replacing political appointees throughout the system with career professionals, or just promising the incumbents jobs for life instead of a sexenio is one way of improving. People think twice about taking a 3,000-peso bribe if a 40-year career is at stake. This, however, is some way off although it has been in the agency's stated aims for several years.

"We're working on having a professional career setup, but this department wasn't set up yesterday. There are people with up to 40 years of service, some of whom have just a primary education. You can't fire these people at the stroke of a pen," said Juan Manuel Herrero, general administrator for collection at the SAT.

There are also hundreds of unemployed tax officials who are out of a job because it depended on which political party was in power, or sometimes who the finance secretary was. A change of Cabinet minister causes changes all the way down the ladder and results in the loss of key personnel at the top. A private company would see this as disastrous.

"I know a lot of people who worked in the SAT under (former President Ernesto) Zedillo who aren't there any more because there isn't a professional civil service. You lose expertise and the new people all have a learning curve," said Carlos Niezen, a consultant at A.T. Kearney who helped put together some proposals for the agency in the mid '90s that were mostly ignored.

POLITICAL CURVEBALLS

The modern history of the tax service is one of missed opportunities. The Zedillo administration separated it out from the Finance Secretariat, arguing revenue and spending are totally different functions. Zedillo saw the agency as a machine for collecting the taxes upon which Congress decided. President Fox claimed more political control was needed and brought it back into the secretariat.

This goes against the global trend and also against the strategies of countries that are among the acknowledged leaders in tax collection like Australia and New Zealand where the rates of evasion are among the lowest in the world.

Most of the work of a tax collection service is repetitive and is best done by automation using the latest technology. To do it well means spending on the latest equipment and hiring topnotch computer programmers. The Mexican government doesn't have the money to do this but could solve the problem the way it was done in the United Kingdom--by outsourcing these functions and leaving the government to the job of fighting evasion and fraud. This might have been easier had the agency been left as independent.

FOLLOW THE CORPORATE MODEL

The double reorganization also wasted precious years and has prevented the implementation of changes to the structure to make it more effective. The SAT is divided into legal, auditing and collection and the three departments are separate. That means a lawyer may one day be looking at a multinational company like Cemex and the next day be resolving a dispute with a corner bakery.

Most governments in the world have organized it differently, copying companies like Procter & Gamble or Colgate where managers are assigned to look after toothpaste or detergent but never both at once. This makes the teams experts in their area. The SAT would become more effective if it were divided according to the type of tax-payer; independent professionals in one area, small farmers in another and family-owned businesses in another.

"You get faster and more knowledgeable teams who work together. For example, if the auditor goes to a company and the company's lawyer starts saying this or that law reduces its tax liability, you need another lawyer in the room to contradict him," said Niezen.

The agency itself acknowledges this by saying it is trying to make the areas cooperate more. "We are working together more, the front office with the back office. We are looking at the work in terms of the whole process and not by area," said Herrero.

The biggest change at the SAT during the Fox administration is the most obvious. High technology has arrived in the way of Internet payments. The agency is proud that 95% of tax revenue now comes in over the Web. With one of the lowest Internet penetrations in Latin America, though, this has brought its own problems, showing that in this process it's hard to hit a home run.

"Many of my clients don't have a computer," said Juarez, who looks after the taxes for small businesses and independent professionals. "This has made more problems for them."

The reason why Internet payments have become compulsory in most cases is a good one, and perhaps the biggest challenge the agency faces--fraud and evasion. The information gleaned electronically is easier to monitor and store and contains fewer mistakes. It is also easier to search it for patterns that might indicate a crime.

Most of the recent changes, including the controversial home visits, are designed to attack this widespread fraud problem. Without more major changes, though, the SAT is likely to remain one of the worst tax collectors in Latin America.

John Moody, a former reporter for Bloom berg News, has covered financial issues in Mexico for almost a decade.