Efficiency and Equity of a Marginal Tax Reform - Income, Quality, and Price Elasticities for Mexico
The author investigates the effects of a marginal tax reform on household welfare in Mexico. He estimates the extent to which Mexican households react to changes in prices, and uses the estimates to simulate changes in social welfare resulting from marginal tax reform. Results indicate that poorer households tend to have significantly larger income and price elasticities. Hence, to correctly evaluate the effects of economic policies on the poor, it is important to estimate elasticities that reflect the behavioral responses of the poor rather than of the entire population. The results from the micro simulation suggest that since poorer households rely mostly on maize, legumes, and vegetables to fulfill their caloric intake, any price reform that reduces the price of these products will have a larger effect on the welfare of poor households. In particular, reducing the taxes on maize, alcoholic beverages, and vegetables would be both more equitable and more efficient in terms of social welfare. Meanwhile, a reduction in the tax on legumes, sugar, and oils and fats, while inefficient, would contribute to reduce inequality. Finally, a decrease in the price of meat, wheat, and dairy products, while benefiting higher-income households, would have only a marginal impact on poorer households.
| Summary: | The author investigates the effects of a
marginal tax reform on household welfare in Mexico. He
estimates the extent to which Mexican households react to
changes in prices, and uses the estimates to simulate
changes in social welfare resulting from marginal tax
reform. Results indicate that poorer households tend to have
significantly larger income and price elasticities. Hence,
to correctly evaluate the effects of economic policies on
the poor, it is important to estimate elasticities that
reflect the behavioral responses of the poor rather than of
the entire population. The results from the micro simulation
suggest that since poorer households rely mostly on maize,
legumes, and vegetables to fulfill their caloric intake, any
price reform that reduces the price of these products will
have a larger effect on the welfare of poor households. In
particular, reducing the taxes on maize, alcoholic
beverages, and vegetables would be both more equitable and
more efficient in terms of social welfare. Meanwhile, a
reduction in the tax on legumes, sugar, and oils and fats,
while inefficient, would contribute to reduce inequality.
Finally, a decrease in the price of meat, wheat, and dairy
products, while benefiting higher-income households, would
have only a marginal impact on poorer households. |
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