POLIMOD: The Calculation of VAT and Excise Duties on Household Expenditure. 1994/95 and 1995/96

This paper describes how the 1994/95 and the 1995/96 Family Expenditure Survey (FES) were used to produce one of the four datasets that act as microdata input for POLIMOD, the dataset containing information on household expenditure. The other three datasets produced from the FES and used as POLIMOD input contain income data and are described elsewhere1. Variables used by POLIMOD are defined in terms of the FES datasets which are available through MIDAS, the national computer service run by the University of Manchester. The purpose of creating expenditure variables is outlined in Section 1. The general approach to calculating indirect taxes is presented in Section 2. The method for calculating VAT paid by a household is described in Section 3 and the method for calculating excise duties paid by the household is described in Section 4. In Section 5 the implications of the assumptions made regarding consumer behaviour when calculating indirect taxes are discussed. Section 6 identifies the implications of varying the assumption about producer behaviour that pre-tax prices remain constant after a tax change and instead assuming that retail constant prices remain constant following a tax change. 1 The derivation of income variables from the 1994/95 FES is described in Microsimulation Unit Research Note MU/RN/27 and from the 1995/96 FES in Microsimulation Unit Research Note MU/RN/28. This Research Note describes the derivation of household expenditure variables from both the 1994/95 and 1995/96 FES.