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

Author

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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.

Suggested Citation

  • Nicita, Alessandro, 2004. "Efficiency and equity of a marginal tax reform - income, quality, and price elasticities for Mexico," Policy Research Working Paper Series 3266, The World Bank.
  • Handle: RePEc:wbk:wbrwps:3266
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    References listed on IDEAS

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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, July.
    2. 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.
    3. Deaton, Angus, 1988. "Quality, Quantity, and Spatial Variation of Price," American Economic Review, American Economic Association, vol. 78(3), pages 418-430, June.
    4. Deaton, Angus, 1990. "Price elasticities from survey data : Extensions and Indonesian results," Journal of Econometrics, Elsevier, vol. 44(3), pages 281-309, June.
    5. Ahmad,Etisham & Stern,Nicholas, 1991. "The Theory and Practice of Tax Reform in Developing Countries," Cambridge Books, Cambridge University Press, number 9780521265638.
    6. Deaton, A. & Grimard, F., 1992. "Demand Analysis and Tax Reform in Pakistan," Papers 85, World Bank - Living Standards Measurement.
    7. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762.
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    Citations

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    Cited by:

    1. Ekaterina Krivonos & Marcelo Olarreaga, 2009. "Sugar Prices, Labor Income, and Poverty in Brazil," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 95-128, January.
    2. 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.
    3. 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.
    4. 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.
    5. Charles Ackah, & Simon Appleton, "undated". "Food Price Changes and Consumer Welfare in Ghana in the 1990s," Discussion Papers 07/03, University of Nottingham, CREDIT.
    6. repec:wsi:wschap:9789813108721_0005 is not listed on IDEAS
    7. Yuyu Chen & Weibo Xing, 2016. "Quantity, Quality, and Regional Price Variation of Cigarettes: Demand Analysis Based on a Household Survey in China," World Scientific Book Chapters,in: Economics of Tobacco Control in China From Policy Research to Practice, chapter 5, pages 61-87 World Scientific Publishing Co. Pte. Ltd..
    8. 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.

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