Tax-benefit incidence of value added tax on food and medicine to fund progressive social expenditure

Jaime Acosta-Margain ()
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Jaime Acosta-Margain: Rice University

No 194, Working Papers from ECINEQ, Society for the Study of Economic Inequality

Abstract: In 2009, the Mexican Congress received a proposal of a generalized 2% increase in the statutory VAT rate, including currently untaxed food and medicine. Whereas opponents emphasized the regressive effect, supporters argued that progressivity of the compensatory expenditures included in the bill more than compensated the bottom income quintiles. In this paper I present a tax-benefit incidence of this proposal using national survey data on household's income and consumption. Despite the regressive effect of the tax increase, the data shows that the progressive expenditure offsets this effect. Overall the proposal was progressive. This finding undermines the arguments in favor of keeping food and medicines exempt of VAT to prevent a regressive effects. This result also contributes to the debate about the regressive effects of a single VAT to all consumption and no exemptions. To illustrate that, I analyze the redistributive effect of this policy. The result is that the increase in public expenditure can offset the regressive effect of this policy.

Keywords: Value added tax; tax-benefit incidence. (search for similar items in EconPapers)
JEL-codes: H20 H22 H27 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011
New Economics Papers: this item is included in nep-agr
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Citations: View citations in EconPapers (1)

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