Tax-Benefit Incidence Of Value Added Tax On Food And Medicine To Fund Progressive Social Expenditure
In 2009, the Mexican Congress received a proposal of a generalized 2% increase in the statutory VAT rate, including currently untaxed food and medicine. Whereas opponents emphasized the regressive effect, supporters argued that progressivity of the compensatory expenditures included in the bill more than compensated the bottom income quintiles. In this paper the author presents a tax-benefit incidence of this proposal using national survey data on household's income and consumption. Despite the regressive effect of the tax increase, the data shows that the progressive expenditure offsets this effect. Overall the proposal was progressive. This finding undermines the arguments in favor of keeping food and medicines exempt of VAT to prevent a regressive effects.