Tax avoidance and environmental implications: Vehicle Registrations in Mexico

This paper examines the impact of decentralizing vehicle registration fees in Mexico, analyzing the resulting tax avoidance and price response behaviors and their effects on vehicle fleet composition and environmental outcomes. By using a differences in difference with a synthetic control across price bins before and after the policy change, we create a counterfactual distribution that allows us to see that decentralization led to tax avoidance and the tax schedule lead to increased purchases of cheaper cars that are more fuel efficient but worse at the tail pipe.The analysis further explores the implications of these changes by modeling the individuals response to the tax and studying different counterfactual scenarios such a improving compliance or changing the tax schedule finding that avoidance mitigates the distortionary effects of the tax.