Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/289922 
Year of Publication: 
2023
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-1475
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
The Value-Added Tax (VAT) is the most prevalent consumption tax globally, yet it is frequently deemed highly regressive. To address this, we propose a Personalized VAT (PVAT) devised in conjunction with a distributional policy. We aim to achieve three objectives: increase revenue collection, achieve progressivity, and disrupt the intergenerational dependency of low-income households. We use Mexico as a case study, showing that eliminating all special VAT regimes and standardizing the rate at 16% could contribute an additional 2.2% of GDP to fiscal revenues. However, such a reform could have severe negative welfare impacts on the poor. To tackle this dilemma, we propose several PVAT scenarios. Our results indicate that a PVAT could be fiscally neutral or even increase revenues by up to 0.83% of GDP, while benefiting the lowest-income households. Lastly, we analyze the general equilibrium effects of a PVAT and various distributional policies, including lump-sum and capital transfers. For this purpose, we employ an overlapping generations model calibrated for Mexico. Our simulations reveal welfare enhancing and output growth results through a PVAT policy that includes capital transfers, thereby presenting a viable strategy for breaking intergenerational dependency.
Subjects: 
Value-added tax
Personalized value-added Tax
Tax reform
Overlappinggenerations
Inci-dence
JEL: 
E62
H21
O11
O12
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper

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