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Efficiency and equity of a marginal tax reform - income, quality, and price elasticities for Mexico

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  • Nicita, Alessandro

Abstract

The author investigates the effects of a marginal tax reform on household welfare in Mexico. He estimates the extent to which Mexican households react to changes in prices, and uses the estimates to simulate changes in social welfare resulting from marginal tax reform. Results indicate that poorer households tend to have significantly larger income and price elasticities. Hence, to correctly evaluate the effects of economic policies on the poor, it is important to estimate elasticities that reflect the behavioral responses of the poor rather than of the entire population. The results from the micro simulation suggest that since poorer households rely mostly on maize, legumes, and vegetables to fulfill their caloric intake, any price reform that reduces the price of these products will have a larger effect on the welfare of poor households. In particular, reducing the taxes on maize, alcoholic beverages, and vegetables would be both more equitable and more efficient in terms of social welfare. Meanwhile, a reduction in the tax on legumes, sugar, and oils and fats, while inefficient, would contribute to reduce inequality. Finally, a decrease in the price of meat, wheat, and dairy products, while benefiting higher-income households, would have only a marginal impact on poorer households.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3266.

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Date of creation: 01 Apr 2004
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Handle: RePEc:wbk:wbrwps:3266

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Keywords: Economic Theory&Research; Crops&Crop Management Systems; Food&Beverage Industry; Environmental Economics&Policies; Markets and Market Access; Environmental Economics&Policies; Economic Theory&Research; VN-Acb Mis -- IFC-00535908; Inequality; Markets and Market Access;

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References

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  1. Elena Ianchovichina & Alessandro Nicita & Isidro Soloaga, 2002. "Trade Reform and Poverty: The Case of Mexico," The World Economy, Wiley Blackwell, vol. 25(7), pages 945-972, 07.
  2. Deaton, Angus, 1990. "Price elasticities from survey data : Extensions and Indonesian results," Journal of Econometrics, Elsevier, vol. 44(3), pages 281-309, June.
  3. Deaton, A., 1988. "Quality, Quantity, And Spatial Variation Of Price," Papers 30, World Bank - Living Standards Measurement.
  4. Ahmad,Etisham & Stern,Nicholas, 1991. "The Theory and Practice of Tax Reform in Developing Countries," Cambridge Books, Cambridge University Press, number 9780521397421, April.
  5. Deaton, Angus, 1987. "Estimation of own- and cross-price elasticities from household survey data," Journal of Econometrics, Elsevier, vol. 36(1-2), pages 7-30.
  6. Deaton, A. & Grimard, F., 1992. "Demand Analysis and Tax Reform in Pakistan," Papers 85, World Bank - Living Standards Measurement.
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Cited by:
  1. Charles Ackah, & Simon Appleton, . "Food Price Changes and Consumer Welfare in Ghana in the 1990s," Discussion Papers 07/03, University of Nottingham, CREDIT.
  2. Yoko Niimi, 2005. "An Analysis of Household Responses to Price Shocks in Vietnam: Can Unit Values Substitute for Market Prices?," PRUS Working Papers 30, Poverty Research Unit at Sussex, University of Sussex.
  3. Susan Olivia & John Gibson, 2008. "Household Energy Demand and the Equity and Efficiency Aspects of Subsidy Reform in Indonesia," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 21-40.
  4. Ekaterina Krivonos & Marcelo Olarreaga, 2009. "Sugar Prices, Labor Income, and Poverty in Brazil," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  5. Castañon-Herrera, Alberto & Urzúa, Carlos M., 2012. "The non-optimality of the Mexican indirect tax system," EGAP Chapters, in: Fiscal Inclusive Development: Microsimulation Models for Latin America Tecnológico de Monterrey, Campus Ciudad de México.
  6. Nicita, Alessandro, 2004. "Who benefited from trade liberalization in Mexico? Measuring the effects on household welfare," Policy Research Working Paper Series 3265, The World Bank.
  7. A. K. Seth & Ankur Bhatnagar, 2008. "Influence Of Demographic Variables On Indirect Tax Setting For Selected Indian States," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 53(02), pages 293-316.
  8. Chen, Yuyu & Xing, Weibo, 2011. "Quantity, quality, and regional price variation of cigarettes: Demand analysis based on a household survey in China," China Economic Review, Elsevier, vol. 22(2), pages 221-232, June.

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