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

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  • Jaime Acosta-Margain

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    (Rice University)

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    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.

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    File URL: http://www.ecineq.org/milano/WP/ECINEQ2011-194.pdf
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    Bibliographic Info

    Paper provided by ECINEQ, Society for the Study of Economic Inequality in its series Working Papers with number 194.

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    Length: 24 pages
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:inq:inqwps:ecineq2011-194

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    Keywords: Value added tax; tax-benefit incidence.;

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    1. Shah, Anwar & Whalley, John, 1991. "Tax Incidence Analysis of Developing Countries: An Alternative View," World Bank Economic Review, World Bank Group, vol. 5(3), pages 535-52, September.
    2. Sehili, Saloua & Wodon, Quentin, 2008. "Analyzing the Potential Impact of Indirect Tax Reforms on Poverty with Limited Data: Niger," MPRA Paper 11074, University Library of Munich, Germany.
    3. David Altig & Alan J. Auerbach & Laurence J. Kotlikoff & Kent A. Smetters & Jan Walliser, 1997. "Simulating U.S. tax reform," Working Paper 9712, Federal Reserve Bank of Cleveland.
    4. Aled ab Iorwerth & John Whalley, 2002. "Efficiency considerations and the exemption of food from sales and value added taxes," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 166-182, February.
    5. Jorge Martinez-Vazquez, 2001. "Mexico: An Evaluation of the Main Features of the Tax System," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0112, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
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