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

Author

Listed:
  • Aldair Rivas

    (Instituto Nacional de Estadística y Geografía (INEGI))

  • Emmanuel Chavez

    (Division of Economics, CIDE)

  • Irvin Rojas

    (Division of Economics, CIDE)

  • Aaron Zaragoza

    (Division of Economics, CIDE)

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.

Suggested Citation

  • Aldair Rivas & Emmanuel Chavez & Irvin Rojas & Aaron Zaragoza, 2024. "The Legal and Real Incidence of VAT Reforms in Mexico: Distributional Effects and Impacts on Poverty," Working Papers DTE 640, CIDE, División de Economía.
    • Handle: RePEc:emc:wpaper:dte640
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    File URL: http://www.economiamexicana.cide.edu/RePEc/emc/pdf/DTE/DTE640.pdf
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    Keywords

    VAT incidence; distributional effects; poverty;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue

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