Valued-Added Tax Revenues in Mexico: An Empirical Analysis

Abstract

This article analyzes the effect of changes in the valued-added tax (VAT) rate on real VAT revenue in Mexico. Recently, there has been a heated debate on the optimal VAT system and the potential economic impact of a reduction in the VAT rate in the country. The results from estimating a VAT revenue model suggest that there seems to be a positive relationship between VAT revenue and the tax rate around the actual VAT rate, contrary to the assertion that there is a Laffer curve for the VAT in Mexico. A 1 percentage point change in the VAT rate results in a 2.4% change in real VAT revenues. Leaving aside other fiscal reform considerations, the results appear to be robust to alternative empirical specifications.

The Evolution of Vat Rates and Government Tax Revenue in Mexico

“…The results from the variance decompositions (VDC) and impulse response functions (IRF) suggest that VAT rate increases lead to increases in government tax receipts. Thus, the findings support the contention that Mexico is on the upward sloping portion of the Laffer curve (see also Tijerina-Guajardo and Pagán [2000]). Further, VAT revenue falls as a result of a one-time increase in the inflation rate.…”

“…As a policy response to the 1994 peso crisis, in April 1995 the Mexican government increased the Value Added Tax (VAT) rate from 10 to 15%. However, recent changes in Mexico's political power structure have led to intense congressional debate on the potential economic effects of a reduction in the VAT rate (Banamex, 1997;Tijerina-Guajardo and Pagán, 2000). Most of this discussion centers on the potential effects of tax law changes on government tax revenue (Banamex, 1997).…”

Value Added Tax Dimension: The Case of Lithuania

“…The International Monetary Fund has carried out a research which deals with a set of key value added tax theoretical provisions, global trends and problems arising from introduction and administration of value added tax (Ebrill, 2001). Tijerina-Guajardo and Pagan (2000) have carried out a research on VAT in Mexico, in which they assessed the impact of various macroeconomic and value added tax regulation factors on income from VAT. Agha and Haughton (1996) have analyzed the impact of a standard VAT tariff on tax avoidance.…”

“…It has raised the question, of the impact of other non-standard VAT tariffs on income from VAT. The results have shown that the number of tariffs is statistically important, and a larger number of tariffs increased income from VAT (Tijerina-Guajardo, 2000).…”

“…A study of the International Monetary Fund (IMF), which analyzed different factors influencing the collection of income from VAT, has revealed that an increase of the standard VAT tariff increased the income from VAT (Ebrill, 2001). A Mexican case study has confirmed this tendency (Tijerina-Guajardo, 2000). The IMF research has noted that statistically relevant is the difference between the standard VAT tariff and the lowest reduced tariff, but not the 0% tariff.…”