The distributional impact of reforms to direct and indirect tax in Mexico: analytical report and results

This is the final paper of a study aimed at building capacity for the distributional analysis of tax reforms in Mexico and other similar middle‐income countries, characterised by the prevalence of tax avoidance and evasion in both the consumption and labor markets and a need to improve the quality of the micro‐data suitable for this type of analysis. We develop a tax micro‐simulation (MEXTAX) and method to analyse these types of tax reforms. Our methodology can quantify the revenue and distributional impact of tax reforms under both the assumption that individuals do not change their behavior as a consequence of changes in taxes, and the assumption that individuals react to these changes along specific margins. Particularly, we incorporate individuals' response to tax changes in their labor supply, changes in consumer spending as a result of changes in indirect taxes, and less‐than‐full pass‐through of indirect tax changes to consumer prices by firms.