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Financing Poverty Alleviation: IVA vs ISR. An Applied General Equilibrium Approach

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  • Núñez, Gaspar
  • Polo, Clemente

Abstract

The goal of this paper is to analyze two alternative ways of financing poverty alleviation in Mexico: 1) A Value Added Tax (IVA) reform, or 2) A Personal Income Tax (ISR) reform. Using an Applied General Equilibrium Model (AGEM) we evaluate reforms’ impact through the money measure in welfare change given by Hicks’ Equivalent Variation (EV). Results from four basic simulations, using a Social Accounting Matrix prepared by the authors, suggest that: A) An increase in IVA (maintaining its structure) generates a positive global EV, which is considerably greater than that obtained increasing the ISR (also maintaining its structure). B) However, given ISR’s progressive structure, increasing it reduces the distributive gap by diminishing lower income deciles’ contribution, and increasing highest income decile’s contribution. C) A uniform IVA results in a positive global EV considerably larger than the one obtained with a uniform ISR but, as we would expect, highest income decile’s households obtain a high benefit, so deepening the distributive gap.

Suggested Citation

  • Núñez, Gaspar & Polo, Clemente, 2005. "Financing Poverty Alleviation: IVA vs ISR. An Applied General Equilibrium Approach," Conference papers 331329, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331329
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    References listed on IDEAS

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