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

By Rodrigo Mariscal, Alejandro M. Werner

November 8, 2018

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Rodrigo Mariscal, and Alejandro M. Werner The Price and Welfare Effects of The Value-Added Tax: Evidence from Mexico, (USA: International Monetary Fund, 2018) accessed September 20, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Consumer price indexes, Expenditure, Inflation, Price indexes, Prices, Taxes, Value-added tax

Keywords: Center city, Consumer price indexes, Difference-in-differences, Economic Welfare, Inflation, Inflation Pass-Through, Inflation rate, Price index, Price indexes, Tax Incidence, Value-Added Tax, VAT change, VAT effect, VAT reform, VAT-taxed goods, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/240
Stock No:

WPIEA2018240
ISBN:

9781484381632
ISSN:

1018-5941

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