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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 implicit in the respective tax-transfer systems; differences that can otherwise be difficult to discern when systems are complex and opaque.

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Acknowledgments

Azpitarte acknowledges financial support from the Spanish Ministerio de Ciencia e Innovació n (grants ECO2008-03484-C0201/ECON and ECO2010-21668-C03-03) and the Xunta de Galicia (10SEC300023PR). We thank four anonymous reviewers and the journal editor for useful comments on earlier drafts. van de Ven also wishes to thank John Muellbauer for extensive preliminary discussions concerning tax implicit scales. This research was supported by the Australian Research Council Centre of Excellence for Children and Families over the Life Course (project number CE140100027). The Centre is administered by the Institute for Social Science Research at The University of Queensland, with nodes at The University of Western Australia, The University of Melbourne and The University of Sydney. The views expressed herein are those of the authors and are not necessarily those of the Australian Research Council.

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Correspondence to Justin van de Ven.

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van de Ven, J., Hérault, N. & Azpitarte, F. Identifying tax implicit equivalence scales. J Econ Inequal 15, 257–275 (2017). https://doi.org/10.1007/s10888-017-9354-x

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Keywords

  • Equivalence scale
  • Taxation
  • Horizontal equity