Estimating Equivalence Scales for Tax and Benefits Systems

Justin van de Ven

No 229, National Institute of Economic and Social Research (NIESR) Discussion Papers from National Institute of Economic and Social Research

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.

Date: 2004-05
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Working Paper: Estimating Equivalence Scales for Tax and Benefits Systems (2004)
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