Who pays for a Value Added Tax Hike at an International Border? Evidence from Mexico

Abstract

This research studies the effects of a value added tax (VAT) reform at Mexico's international frontiers. The reform raised the VAT rate from 11 to 16 percent at localities close to the international borders. We use the traditional "static" difference-in-differences methodology as well as dynamic difference-in-differences. The treatment group is composed of municipalities in the area where the VAT increased, and the control group iscomposed of municipalities close to the treatment group. We nd that the VAT hike had a positive effect on prices of around half the size of the full pass-through conter-factual. In addition, the reform had a negative effect on workers' wages and no effect on employment. The negative eect on workers' real incomes is not smoothed out with credits. We nd evidence of a negative effect on consumption at Mexico's northern border due to the reform. However, we nd no evidence of an increase in shopping at the United States side of the border.