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

IMF Working Papers, November 8, 2018

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

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Bibliographic details

• Authors: Rodrigo Mariscal, Alejandro M. Werner
• Published: November 8, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484381632.001

Summary and Research Question

• Authors: Rodrigo Mariscal, Alejandro M. Werner
• Date: November 8, 2018
• Objective: Analyze the incidence of the VAT and its effects on the income distribution using two tax reforms in Mexico that increased the VAT rate for a group of cities while leaving the rest unaffected.
• Identification strategy: Compare the inflation rate of affected cities with exempted cities before and after the law changed (difference-in-differences approach referenced in keywords).

Methodology

• Natural experiment: Two VAT rate increases implemented for a subset of cities; other cities exempted.
• Empirical comparison: Inflation rates and price indexes of affected versus exempted cities, before and after reforms.
• Key concepts and techniques referenced: Consumer price indexes, price index, inflation pass-through, tax incidence, economic welfare.

Key Findings

• Price effects:
  • "The effect on prices is limited."
  • Conclusion: "The burden of the tax is indeed shared between producers and consumers."
• Welfare and distribution:
  • "The VAT is progressive in both absolute and relative terms to the overall expenditure."
• Interaction with inflation:
  • "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."

Implications and Interpretations

• Incidence: VAT increases do not fully pass through to consumer prices; producers absorb part of the burden.
• Equity: The VAT, in this context, exhibits progressive effects both in absolute and relative terms with respect to overall expenditure.
• Macro-environment sensitivity: High and persistent inflation amplifies both price pass-through and welfare losses — doubling both for the average household when compared to low or non-persistent inflation environments.

Content in this bundle

• The Price and Welfare Effects of The Value-Added Tax: Evidence from Mexico, WP/18/240, November 2018
  • The Price and Welfare Effects of The Value-Added Tax: Evidence from Mexico, WP/18/240, November 2018 (Markdown version)
  • The Price and Welfare Effects of The Value-Added Tax: Evidence from Mexico, WP/18/240, November 2018 (PDF)