The non-optimality of the Mexican indirect tax system

This chapter starts with a review of the marginal tax reform methodology that was first advanced by Ahmad and Stern (1984), as well as its second-order variant introduced by Urzúa (2005). After that, it reviews some aspects of the estimation of demand systems, a topic that, although well known to applied econometricians, might be unfamiliar to practitioners. Finally, using an estimated demand system, the paper identifies marginal and second-order improvements in the current Mexican indirect tax system. For the non-experts, an appendix provides a computer code in Stata that can be used to estimate demand systems of the type considered here.