Income elasticities of the main taxes in Mexico & the revenue loss due to the COVID-19 pandemic

Abstract

This work focuses on estimating the income elasticity of the main form of taxes in Mexico and quantifying revenue loss during the COVID-19 pandemic. The study employs both Vector Error Correction (VEC) and Autoregressive Distributed Lag with Error Correction Mechanism (ARDL ECM) models. Both model specifications yield robust estimates of income elasticities that confirms that Mexico has an elastic tax revenue. That is, the tax revenue grows more than proportional to GDP growth. Furthermore, the study conducts a counterfactual analysis to estimate revenue loss attributable to the pandemic. The work finds substantial revenue losses across tax categories, around 1% of 2020 GDP.