A Personalized VAT with Capital Transfers: A Reform to Protect Low-Income Households in Mexico
Date issued
Jul 2023
Subject
Rating;
Electricity Consumption;
Value-Added Tax;
Taxation;
Gross Domestic Product;
Low-Wage;
Air Conditioning;
Saving;
Municipal Government;
Economy;
Public Expenditure;
Electricity Tariff;
Tax Reform;
Tariff System;
Climate Change;
Income Distribution
JEL code
E62 - Fiscal Policy;
H21 - Efficiency • Optimal Taxation;
O11 - Macroeconomic Analyses of Economic Development;
O12 - Microeconomic Analyses of Economic Development
Country
Mexico
Category
Working Papers
The Value-Added Tax (VAT) is the most prevalent consumption tax globally, yet it is frequently deemed highly regressive. To address this, we propose a Personalized VAT (PVAT) devised in conjunction with a distributional policy. We aim to achieve three objectives: increase revenue collection, achieve progressivity, and disrupt the intergenerational dependency of low-income households. We use Mexico as a case study, showing that eliminating all special VAT regimes and standardizing the rate at 16% could contribute an additional 2.2% of GDP to fiscal revenues. However, such a reform could have severe negative welfare impacts on the poor. To tackle this dilemma, we propose several PVAT
scenarios. Our results indicate that a PVAT could be fiscally neutral or even increase revenues by up to 0.83% of GDP, while benefiting the lowest-income households. Lastly, we analyze the general equilibrium effects of a PVAT and various distributional policies, including lump-sum and capital transfers. For this purpose, we employ an overlapping generations model calibrated for Mexico. Our simulations reveal welfare enhancing and output growth results through a PVAT policy that includes capital transfers, thereby presenting a viable strategy for breaking intergenerational dependency.
scenarios. Our results indicate that a PVAT could be fiscally neutral or even increase revenues by up to 0.83% of GDP, while benefiting the lowest-income households. Lastly, we analyze the general equilibrium effects of a PVAT and various distributional policies, including lump-sum and capital transfers. For this purpose, we employ an overlapping generations model calibrated for Mexico. Our simulations reveal welfare enhancing and output growth results through a PVAT policy that includes capital transfers, thereby presenting a viable strategy for breaking intergenerational dependency.
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