Identifying tax implicit equivalence scales

Abstract

This paper describes a simple and tractable method for identifying equivalence scales that reflect the value judgements implicit in a tax and transfer system. The approach depends on two identifying assumptions and a functional description for transfer payments that can be estimated using common publicly available data sources. We use this approach to evaluate tax implicit equivalence scales for the tax-transfer systems of 12 European countries that applied in 2012. Cross-country averages for the tax implicit scales generate a surprising set of stylised results: at low incomes, each additional household member increases the tax implicit scale by approximately 0.5, relative to 1.0 for the first adult; at high incomes, the average tax implicit scales describe variation that is remarkably similar to the modified OECD scale. However, substantial cross-country variation underlies these average scales, suggesting important differences in value judgements underlying the respective tax-transfer systems; differences that can otherwise be difficult to discern in complex and opaque systems.

The Use of Hypothetical Household Data for Policy Learning: Comparative Tax‒Benefit Indicators Using EUROMOD HHoT

“…HHoT is comparable to other hypothetical data tools like the tax-benefit model of the OECD 2 or the Social Policy Indicators (SPIN) 3 and CSB-MIPI (Van Mechelen et al 2011) databases. They all provide comparative information on the institutional design of social policies and their impact on the income situation of various model families.…”