A Personalized VAT with Capital Transfers: A Reform to Protect Low-Income Households in Mexico

Laurence J. Kotlikoff, Guillermo Lagarda and Gabriel Marin

No 12985, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: The Value-Added Tax (VAT) is the most prevalent consumption tax globally, yet it is frequently deemed highly regressive. To address this, we propose a Personalized VAT (PVAT) devised in conjunction with a distributional policy. We aim to achieve three objectives: increase revenue collection, achieve progressivity, and disrupt the intergenerational dependency of low-income households. We use Mexico as a case study, showing that eliminating all special VAT regimes and standardizing the rate at 16% could contribute an additional 2.2% of GDP to fiscal revenues. However, such a reform could have severe negative welfare impacts on the poor. To tackle this dilemma, we propose several PVAT scenarios. Our results indicate that a PVAT could be fiscally neutral or even increase revenues by up to 0.83% of GDP, while benefiting the lowest-income households. Lastly, we analyze the general equilibrium effects of a PVAT and various distributional policies, including lump-sum and capital transfers. For this purpose, we employ an overlapping generations model calibrated for Mexico. Our simulations reveal welfare enhancing and output growth results through a PVAT policy that includes capital transfers, thereby presenting a viable strategy for breaking intergenerational dependency.

Keywords: Value-added tax; Personalized value-added Tax; Tax reform; Overlappinggenerations; Inci-dence (search for similar items in EconPapers)
JEL-codes: E62 H21 O11 O12 (search for similar items in EconPapers)
Date: 2023-07
New Economics Papers: this item is included in nep-dge and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:12985

DOI: 10.18235/0005028

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