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GTAP Resource #1688

"Financing poverty alleviation: Value Added Tax vs Income Tax. An applied General Equilibrium Analysis"
by Nunez-Rodriguez, Gaspar and Clemente Polo

Objective of the paper: The goal of this work is to analyze the welfare impact, as measured by Hicks’ Equivalent Variation (EV), of two alternative ways of financing poverty alleviation in Mexico:
a) Increasing the Value Added Tax (VAT) and
b) Increasing the Income Tax (IT).

Description of methods: Based on a Social Accounting Matrix of Mexico for 1996 (the SAM-MX96) elaborated by the authors, we design an Applied General Equilibrium Model (AGEM) to simulate four basic reforms, all of them generating a surplus that is directly transferred to the poorest decile of households to increase their welfare by the same amount:
1) Increasing the VAT while maintaining the same VAT structure.
2) Increasing the IT while maintaining the same IT structure.
3) Setting a uniform VAT.
4) Setting a uniform IT.

Anticipated findings: Results obtained by implementing said AGEM, using the General Algebraic Modeling System (GAMS) to simulate the reforms, suggest that:
a) Reform 1 obtains a positive global EV while Reform 2 obtains a small negative one.
b) However, Reform 2 reduces the distributive gap by increasing the contribution of the highest income decil, as compared to Reform 1, reflecting the fact that IT structure is progressive.
c) Reform 3 also achieves a positive global EV, although smaller, but drastically diminishes the contribution of the highest income decile, so increasing the contribution of lower income deciles and deepening the distributive gap, which reflects the fact that the actual VAT structure is progressive to a degree.
d) Reform 4, basically used as a benchmark since does not constitute a feasible reform, shows, as expected, that the highest income decile of the households would be greatly benefited, while medium income households would pay for most of the reform.

Resource Details (Export Citation) GTAP Keywords
Category: 2005 Conference Paper
Status: Published
By/In: Presented at the 8th Annual Conference on Global Economic Analysis, Lübeck, Germany
Date: 2005
Created: Nunez-Rodriguez, G. (4/24/2005)
Updated: Nunez-Rodriguez, G. (4/24/2005)
Visits: 2,153
No keywords have been specified.

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