Mexico's tax system is a paradox. The tax policy and tax administration reforms of the late 1980s and early 1990s delivered a tax structure that is in many ways comparable, if not superior, to that in many OECD countries. However, Mexico's tax system continues to perform in some fundamental ways, in particular in its ability to raise adequate revenues, worse than the tax system of many developing countries. The basic objective of this evaluation is to try to explain this paradox. In doing that we will compare the revenue performance of Mexico's tax system to that of other developing and developed countries and examine Mexico's tax system buoyancy and elasticity over time. The evaluation will also take stock of the recent performance of Mexico's tax system vis-a-vis other important objectives of any tax system. In particular, we will examine the vertical and horizontal distribution of tax burdens, the relative distortions or excess burdens introduced by the tax system in the decisions of economic agents, and its relative complexity and impact on tax administration and taxpayer compliance costs. The main objective of the evaluation is to identify the most important avenues for reform in tax policy, tax administration, and the political economy of tax reform in Mexico. The improvements in Mexico's tax structure have been many during the last 10 to 15 years. Examples in the area of income taxation include the practically full indexation of personal and enterprise profit tax for inflation, the full integration of these two taxes to avoid the double taxation of dividends, and the application of a minimum tax on gross assets, to which the enterprise profit tax is creditable, to combat tax evasion. The structures of the VAT and excise taxes are also on the whole quite adequate. While many nuisance taxes were eliminated, the standard tax rates for the main taxes are similar to or slightly below international averages. The effective marginal rates of taxation on new investment, as also reviewed below, have been found to be below those of most OECD and Latin American countries, thus creating a favorable atmosphere for domestic and foreign investment. And yet, with all these good characteristics, Mexico's tax system has not been able to generate much more that 10 to 11 percent of tax revenues in relation to GDP. The most important issue before proceeding with tax reform, especially if the most important objective is to increase the revenue adequacy of the system, is to explain what factors may account for this enduring low tax effort. Working Paper Number 01-12.