The legal and real incidence of VAT Reforms in Mexico: Distributional effects and impacts on poverty

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, and the impacts on poverty can vary considerably.