Tax reform in Mexico: a general equilibrium assessment

Abstract

This article reports the results of an Applied General Equilibrium Model (AGEM) built to simulate a recent fiscal reform initiative of the Mexican government. Treating public revenues as endogenous and tax rates as exogenous variables, the model explicitly incorporates both the tax structure and the oil-exporting sector as important sources of government revenues. The results confirm that the fiscal problem in Mexico lies in the low degree of tax compliance. By simulating the reform starting in the year 2008, the results suggest that consumption taxes are not necessarily the unique solution to the tax collection process in a developing country like Mexico.

Notes

¹ Borges (1986) provided a very detailed classification of models built in the 1980s. For more recent developments, see Kehoe et al. (2003).

² Results of previous research in Mexico suggest that reforms that appear on paper to restructure substantially the tax system may have little effects on revenues, and even effective taxes (Perry et al., 2000).

³ Table 3 describes the 28 sectors.