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Identifying Tax Implicit Equivalence Scales

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  • Justin van de Ven

    ()
    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; National Institute of Economic and Social Research)

  • Nicolas Herault

    ()
    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Francisco Azpitarte

    ()
    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; Brotherhood of St Laurence)

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    Abstract

    This paper describes a simple and tractable method for identifying equivalence scales that reflect the value judgements implicit in a tax and benefits system. The approach depends upon two assumptions that are standard in the literature concerned with inequality and tax progressivity, in addition to a functional description for transfer payments that can be estimated using common micro-data sources. We use this approach to evaluate tax implicit equivalence scales for the UK transfer system that applied in April 2009. The tax implicit scales that we identify for the UK vary positively with tax unit size and are decreasing in gross earnings, reflecting recent econometric estimates based on consumption data. We conclude by discussing a range of potential applications for the proposed tax implicit scales.

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    Bibliographic Info

    Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2014n03.

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    Length: 15pp
    Date of creation: Mar 2014
    Date of revision:
    Handle: RePEc:iae:iaewps:wp2014n03

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    Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
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    Web page: http://www.melbourneinstitute.com/
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    Keywords: Equivalence scale; taxation; base dependence;

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    1. Udo Ebert & Peter J Lambert, . "Horizontal Equity and Progession when Equivalence Scales are not Constant," Discussion Papers 02/02, Department of Economics, University of York.
    2. Muellbauer, John, 1975. "The cost of living and taste and quality change," Journal of Economic Theory, Elsevier, vol. 10(3), pages 269-283, June.
    3. Feldstein, Martin, 1976. "On the theory of tax reform," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 77-104.
    4. Olken, Benjamin A., 2005. "Revealed community equivalence scales," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 545-566, February.
    5. Koulovatianos, Christos & Schroder, Carsten & Schmidt, Ulrich, 2005. "On the income dependence of equivalence scales," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 967-996, June.
    6. Pollak, Robert A & Wales, Terence J, 1979. "Welfare Comparisons and Equivalence Scales," American Economic Review, American Economic Association, vol. 69(2), pages 216-21, May.
    7. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, October.
    8. Seneca, Joseph J & Taussig, Michael K, 1971. "Family Equivalence Scales and Personal Income Tax Exemptions for Children," The Review of Economics and Statistics, MIT Press, vol. 53(3), pages 253-62, August.
    9. Lewbel, Arthur, 1989. "Household equivalence scales and welfare comparisons," Journal of Public Economics, Elsevier, vol. 39(3), pages 377-391, August.
    10. de Ree, Joppe & Alessie, Rob & Pradhan, Menno, 2013. "The price and utility dependence of equivalence scales: Evidence from Indonesia," Journal of Public Economics, Elsevier, vol. 97(C), pages 272-281.
    11. Stewart, Mark B., 2009. "The estimation of pensioner equivalence scales using subjective data," The Warwick Economics Research Paper Series (TWERPS) 893, University of Warwick, Department of Economics.
    12. Lambert, Peter J, 1993. "Inequality Reduction through the Income Tax," Economica, London School of Economics and Political Science, vol. 60(239), pages 357-65, August.
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