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

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  • Rodrigo Mariscal
  • Alejandro M. Werner

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.

Suggested Citation

  • Rodrigo Mariscal & Alejandro M. Werner, 2018. "The Price and Welfare Effects of The Value-Added Tax: Evidence from Mexico," IMF Working Papers 2018/240, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2018/240
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    Cited by:

    1. Bachas, Pierre & Gadenne, Lucie & Jensen, Anders, 2020. "Informality, Consumption Taxes and Redistribution," The Warwick Economics Research Paper Series (TWERPS) 1277, University of Warwick, Department of Economics.
    2. Asatryan, Zareh & Gomtsyan, David, 2020. "The incidence of VAT evasion," ZEW Discussion Papers 20-027, ZEW - Leibniz Centre for European Economic Research.
    3. Calderón, Mariana & Cortés, Josué & Pérez Pérez, Jorge & Salcedo, Alejandrina, 2023. "Disentangling the Effects of Large Minimum Wage and VAT Changes on Prices: Evidence from Mexico," Labour Economics, Elsevier, vol. 80(C).
    4. Emmanuel Chavez & Cristobal Dominguez, 2021. "Who pays for a Value Added Tax Hike at an International Border? Evidence from Mexico," Working Papers halshs-03364026, HAL.
    5. Raymundo M. Campos-Vazquez & Gerardo Esquivel, 2023. "The Effect of the Minimum Wage on Poverty: Evidence from a Quasi-Experiment in Mexico," Journal of Development Studies, Taylor & Francis Journals, vol. 59(3), pages 360-380, March.
    6. Cesar Revoredo-Giha & Luiza Toma & Faical Akaichi, 2020. "An Analysis of the Tax Incidence of VAT to Milk in Malawi," Sustainability, MDPI, vol. 12(19), pages 1-17, September.
    7. Campos-Vazquez Raymundo M. & Delgado Victor & Rodas Alexis, 2020. "The effects of a place-based tax cut and minimum wage increase on labor market outcomes," IZA Journal of Labor Policy, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 10(1), pages 1-24, March.
    8. Campos-Vazquez, Raymundo M. & Esquivel, Gerardo, 2020. "The effect of doubling the minimum wage and decreasing taxes on inflation in Mexico," Economics Letters, Elsevier, vol. 189(C).

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