Estimating Equivalence Scales for Tax and Benefits

Transfer systems are often comprised of many tax and benefit schemes. The payments assigned to households by each of these schemes frequently depend upon characteristics such as the number, age, and health status of family members. While it is apparent that a value judgment underlies the relative treatment of different households, the nature of this judgment is not usually transparent due to the ad hoc way that transfer systems have evolved. A simple method is introduced for estimating the relativities that are implicit in transfer policy from commonly available survey data. This method is used to estimate tax implicit equivalence scales for the Australian transfer system.