Equivalence Scales and Taxation: A Simulation Analysis

What constitutes the appropriate adjustment for non-income differences between families? This is a fundamental question that underlies many studies of redistributive equity; and yet, despite a considerable research effort, a generally agreed solution has remained elusive. Elsewhere (Muellbauer and van de Ven, 2002), we have attempted to address this problem by considering the equivalence scales that are implicit in transfer policy. In this paper we expand upon our earlier discussion, by considering the generality of the equivalence scale framework as it relates to tax and benefit systems, and by using simulated data to explore our suggested methods for estimation.