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

_IMF Working Papers, November 8, 2018_

## Source details

**Canonical URL:** [The Price and Welfare Effects of The Value-Added Tax: Evidence from Mexico](https://www.imf.org/en/publications/wp/issues/2018/11/08/the-value-added-tax-evidence-from-mexico-46308)

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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

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### 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.

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## Content in this bundle

- **The Price and Welfare Effects of The Value-Added Tax: Evidence from Mexico, WP/18/240, November 2018**
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  - [The Price and Welfare Effects of The Value-Added Tax: Evidence from Mexico, WP/18/240, November 2018 (PDF)](/-/media/files/publications/wp/2018/wp18240.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2018/11/08/the-value-added-tax-evidence-from-mexico-46308_