Abstract

CABALLERO URDIALES, Emilio  and  LOPEZ GALLARDO, Julio. Public Spending, Income Tax and Private Investment in Mexico. Inv. Econ [online]. 2012, vol.71, n.280, pp.55-84. ISSN 0185-1667.

The objective of this research is to study the relationship between private investment decisions, on the one side, and income tax revenues and public expenditures, on the other, in order to contribute to the debate on a suitable fiscal reform for Mexico. A panel dynamic econometric model was developed for Mexico and various other Latin American countries for the period 1990-2008. We also analyzed the Mexican experience in the period 1986-2007, through a vector autoregressive model. The results of the empirical analysis in all cases support the main assumptions underlying effective demand theory: primary public spending stimulates private investment (crowding in), while taxes on income and value added discourage it, but the net fiscal effect is positive. There is also a strong stimulating effect of Gross Domestic Product (GDP) on private investment (accelerator effect).

Keywords : private investment; income taxes; public spending; acceleration effect; dynamic panel models; auto regressive vectors.

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