The Price and Welfare Effects of the Value-Added Tax: Evidence from Mexico

47 Pages Posted: 10 Dec 2018

See all articles by Rodrigo Mariscal

Rodrigo Mariscal

El Colegio de Mexico; Mexico's Ministry of Finance

Alejandro M. Werner

International Monetary Fund (IMF)

Date Written: November 2018

Abstract

In this paper we analyze the incidence of the VAT and its effects on the income distribution. To identify these effects, we rely on two tax reforms undertaken in Mexico that increased the VAT rate for a group of cities and left the rest unaffected. We compare the inflation rate of the affected cities with the exempted cities before and after the law changed. We find that the effect on prices is limited and conclude that the burden of the tax is indeed shared between producers and consumers.Regarding welfare, we find that the VAT is progressive in both absolute and relative terms to the overall expenditure. Finally, we show that an identical change in the VAT rate when inflation is high and persistent doubles its pass-through to inflation and its welfare loss for the average household.

Keywords: Western Hemisphere, Mexico, Value-Added Tax, Tax Incidence, Economic Welfare, Inflation Pass-Through, Difference-in-differences, Incidence, Models with Panel Data

JEL Classification: H22, E31, C23

Suggested Citation

Mariscal, Rodrigo and Werner, Alejandro M., The Price and Welfare Effects of the Value-Added Tax: Evidence from Mexico (November 2018). IMF Working Paper No. 18/240, Available at SSRN: https://ssrn.com/abstract=3297660

Rodrigo Mariscal (Contact Author)

El Colegio de Mexico ( email )

Camino al Ajusco 20
Col. Pedregal de Santa Teresa
Mexico, City, 10740
Mexico

HOME PAGE: http://www.colmex.mx/

Mexico's Ministry of Finance ( email )

Av. Insurgentes Sur No. 1971
Torre III, Piso 9
Mexico City, CDMX 01020
Mexico

Alejandro M. Werner

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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