The effect of legal entropy on value-added tax in Mexico, 1978–2023

This study investigates the relationship between legal entropy (LE) and value-added tax (VAT) in Mexico. Legal entropy is considered a measure of uncertainty or instability within the legal framework, which may influence tax collection and government revenues. To explore this relationship, the study employs a causality approach combined with an autoregressive distributed lag (ARDL) model to assess both short-term and long-term dynamics. The results indicate a unidirectional causal link running from LE to VAT, suggesting that changes in legal uncertainty directly affect tax performance. However, no long-run cointegration is found between the two variables, implying the absence of a stable equilibrium relationship over time. In the short term, a one percent increase in the entropy index is estimated to reduce VAT revenue by approximately 2.06 percent. These findings highlight the potential risks posed by legal uncertainty for fiscal stability and effective tax policy.