The Legal and Real Incidence of VAT Reforms in Mexico: Distributional Effects and Impacts on Poverty

Aldair Rivas (), Emmanuel Chavez, Irvin Rojas and Aaron Zaragoza ()
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Aldair Rivas: Instituto Nacional de Estadística y Geografía (INEGI)
Aaron Zaragoza: Division of Economics, CIDE

No DTE 640, Working Papers from CIDE, División de Economía

Abstract: This paper studies the price effects of two asymmetric value-added tax (VAT) reforms in Mexico: a 2014 VAT hike and a 2021 VAT cut implemented in the southern border region. Our estimates show that consumers pay for 25 percent of the VAT change in both reforms, but consumer incidence differs across goods. With the price effect estimates (real incidence), we determine the impact of the VAT reforms on income distribution and poverty. We compare these impacts with the full passthrough of the VAT on prices (legal incidence). Depending on the type of price incidence, the VAT is allocated differently along the income distribution. Moreover, the impact on poverty due to the VAT (hike or cut) real incidence is small (less than ±0.5 percent change). In contrast, the VAT cut legal incidence decreases extreme poverty by 8.3 percent.

Keywords: VAT incidence; distributional effects; poverty (search for similar items in EconPapers)
JEL-codes: H22 H23 H27 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2024-10
New Economics Papers: this item is included in nep-pbe
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