Tax-Paying towards Equity: A Reform Proposal for the Value-Added Tax

Establishing a uniform 15% VAT rate for every good and service subject to this tax would generate additional fiscal resources of, at least, 81.2 billion pesos. The approximate cost of granting an exact compensation for the first three quartiles of the income distribution (in case of considering this as target population) for the impact of such measure—under the pessimistic assumption that 75% of the increase in VAT rates is transferred to prices—to the first three quartiles of income distribution (considered as the target population) would amount to 32.5 billion pesos. The measure would therefore generate 48.7 billion pesos worth of net resources for the three levels of government (federal government, states and municipalities). In fact, it is possible to overcompensate part of the low-income population, and even the entire low-income population, and yet generate available net resources by making the VAT reform simultaneously revenue-raising and redistributive. This is independent from the destination of the net resources received by the three levels of government. If, at least, part of those resources is channeled towards social programs, the redistributive impact of such reform is strengthened. ∗ The authors are officials at the Mexican Ministry of Finance (Secretaría de Hacienda y Crédito Público) and the Mexican Social Security Institute (Instituto Mexicano del Seguro Social). The opinions expressed hereby are not necessarily a reflection of those at the institutions where they work. This paper was presented on the Conference on Fiscal and Financial Reforms in Latin America, Stanford University, November 9-11, 2000.