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Estimating Equivalence Scales for Tax and Benefits Systems

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Justin van de Ven ()

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Abstract

When comparing, say, the welfare derived from income by a family that is comprised of two adults and three children to that of a single adult, it is necessary to take into consideration the relative needs of the respective households. The most common means by which applied studies in economics currently relate the needs of heterogeneous income units is through the use of equivalence scales. Despite a considerable research effort, however, almost every aspect of equivalence scale specification remains controversial.What characteristics should equivalence scales take into account? Should the scales apply an additive or multiplicative adjustment to income? Is the assumption of base independence valid?1 How should a reference unit be selected? Is it reasonable to assume that there is no inequality within an income unit? What criteria are most sensible for selecting a functional form? And, arguably most important, do the cardinal relations implied by equivalence scales permit income units to be compared in terms of underlying welfare? All of these questions remain largely unresolved.

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Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 229.

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Date of creation: May 2004
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Handle: RePEc:nsr:niesrd:229

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  1. Donaldson, D. & Pendakur, K., 1999. "Equivalent-Income Functions and Income-Dependent Equivalence Scales," Discussion Papers dp99-8, Department of Economics, Simon Fraser University.
  2. 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. [Downloadable!] (restricted)
  3. Deaton, Angus S & Muellbauer, John, 1986. "On Measuring Child Costs: With Applications to Poor Countries," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 720-44, August. [Downloadable!] (restricted)
  4. James Banks & Mike Brewer, 2002. "Understanding the relative generosity of government financial support for families with children," IFS Working Papers W02/02, Institute for Fiscal Studies. [Downloadable!]
  5. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
  6. Lambert, Peter J. & Yitzhaki, Shlomo, 1997. "Income tax credits and exemptions," European Journal of Political Economy, Elsevier, vol. 13(2), pages 343-351, May. [Downloadable!] (restricted)
  7. Barro, Robert J & Becker, Gary S, 1989. "Fertility Choice in a Model of Economic Growth," Econometrica, Econometric Society, vol. 57(2), pages 481-501, March. [Downloadable!] (restricted)
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  8. Mike Brewer & Tom Clark, 2002. "The impact on incentives of five years of social security reform in the UK," IFS Working Papers W02/14, Institute for Fiscal Studies. [Downloadable!]
  9. Balcer, Yves & Sadka, Efraim, 1986. "Equivalence scales, horizontal equity and optimal taxation under utilitarianism," Journal of Public Economics, Elsevier, vol. 29(1), pages 79-97, February. [Downloadable!] (restricted)
  10. Kaplow, Louis, 1996. " Optimal Distribution and the Family," Scandinavian Journal of Economics, Blackwell Publishing, vol. 98(1), pages 75-92, March.
  11. Atkinson, A. B. & Bouguignon, F. & Chiappori, P. A., 1988. "What do we learn about tax reform from international comparisons? France and Britain," European Economic Review, Elsevier, vol. 32(2-3), pages 343-352, March. [Downloadable!] (restricted)
  12. Coulter, Fiona A E & Cowell, Frank A & Jenkins, Stephen P, 1992. "Differences in Needs and Assessment of Income Distributions," Bulletin of Economic Research, Blackwell Publishing, vol. 44(2), pages 77-124, April.
  13. Rosen, Harvey S, 1978. "An Approach to the Study of Income, Utility, and Horizontal Equity," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 307-22, May. [Downloadable!] (restricted)
  14. Lewbel, Arthur, 1989. "Household equivalence scales and welfare comparisons," Journal of Public Economics, Elsevier, vol. 39(3), pages 377-391, August. [Downloadable!] (restricted)
  15. Muellbauer, John, 1975. "The cost of living and taste and quality change," Journal of Economic Theory, Elsevier, vol. 10(3), pages 269-283, June. [Downloadable!] (restricted)
  16. Ebert, Udo & Lambert, Peter J, 1999. "Combined Income Taxes and Tax-Benefit Systems," The Economic Record, The Economic Society of Australia, vol. 75(231), pages 397-404, December.
  17. Moyes, Patrick & Shorrocks, Anthony, 1998. "The impossibility of a progressive tax structure," Journal of Public Economics, Elsevier, vol. 69(1), pages 49-65, July. [Downloadable!] (restricted)
  18. Blackorby, C. & Donaldson, D., 1991. "Adult-Equivalence Scales and the Economic Implementation of Interpersonal Comparisons of Well-Being," UBC Departmental Archives 91-08, UBC Department of Economics.
  19. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March. [Downloadable!] (restricted)
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  20. 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. [Downloadable!] (restricted)
  21. 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. [Downloadable!] (restricted)
  22. Ebert, Udo, 1997. "Social Welfare When Needs Differ: An Axiomatic Approach," Economica, London School of Economics and Political Science, vol. 64(254), pages 233-44, May. [Downloadable!] (restricted)
  23. Bourguignon, F. & Spadaro, A., 2000. "Social Preferences Revealed through Effective Marginal Tax Rates," DELTA Working Papers 2000-29, DELTA (Ecole normale supérieure).
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  1. Bargain, Olivier, 2004. "Normative Evaluation of Tax Policies: From Households to Individuals," IZA Discussion Papers 1441, Institute for the Study of Labor (IZA). [Downloadable!]
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