Which households matter most? Capturing equity considerations in tax reform via generalised social marginal welfare weights

Social marginal welfare weights reflect the values of the social planner, or equivalently the underlying social welfare function, when evaluating the welfare impact of a change in public policy such as a tax reform. Using the nationally representative Irish Household Budget Survey, we empirically examine the sensitivity in the distribution of welfare weights to applying alternatives to the commonly employed “default” of Utilitarianism. The alternative weighting schemes we analyse are based upon: the principles of Equal Sacrifice, poverty alleviation, government self-interest and the distinction between deserving and undeserving income. We first examine the correlation between these welfare weights and the underlying measure of household resources. Then, applying these alternative welfare weights to a commonly used indirect tax reform model, the ranking of goods by distributional characteristic, the component of the model capturing distributional concerns, is shown to be highly sensitive to the choice of welfare weights. This sensitivity does not persist when demand responses are also incorporated.