The evolution of VAT rates and government tax revenue in Mexico

José A. Pagán, Gökçe Soydemir, José A. Tijerina-Guajardo

Research output: Contribution to journalArticlepeer-review

Abstract

As a response to the 1994 Mexican peso crisis, in April 1995 the Mexican government increased the Value Added Tax (VAT) rate from 10 to 15%. More recently, policy makers have debated the potential economic impact of a reduction in the VAT rate on VAT revenue. Using a vector autoregression (VAR) model, this article analyzes the dynamics between government spending, inflation, the VAT rate, and VAT revenue in Mexico. The results from the estimated impulse response functions and variance decompositions indicate that VAT rate hikes lead to increases in government tax receipts. Further, tax collections play an important role in explaining movements in the rate of inflation in the Mexican economy. Overall, the findings are consistent with the view that increases (decreases) in the VAT rate result in larger (smaller) tax revenues.

Original languageEnglish (US)
Pages (from-to)424-433
Number of pages10
JournalContemporary Economic Policy
Volume19
Issue number4
DOIs
StatePublished - 2001

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Public Administration

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