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.