ADULT EQUIVALENCE SCALES

This paper estimates adult equivalence scalcs in the context of a nonlinear demand system using cross-section individual household data. It then evaluates the treatment of children under the tax allowance and child benefit systems on the basis of the estimated equivalence scales. The results suggest that a child benefit system allowing for economies of scale in the family is consistent with the cost of children implied by the notion of adult equivalence scale. For any tax and benefit system to be considered equitable it must allow for dissimilar treatment of unequals or similar treatment of equals. Households are unequal not only in terms of their income level, but also in terms of their size and composition. For example, families with children that have the same income as childless families are likely to have lower standards of living because of the financial burden of raising children. Therefore, an equitable tax and benefit system should equivalize the well-being of families with alternative size and composition in the assessment of net income taxes. Most countries attempt to equivalize the well-being of families with different size and composition through child welfare programs. Such programs usually provide assistance to families with children either in the form of a tax allowance, a reduction in the tax liability of the household, or a child b ~ w j i t, a payment to the person who looks after the child. The child welfare programs in developed countries are often based on a child benefit and payments may vary with the number and age of children. In the U.K., for example, the child welfare system was originally based on tax allowance, but since 1977 has changed to one based on child benefit. This cha~lge was implemented mainly because the tax allowance system is regressive since households benefit in proportion to their marginal income tax rate. Under the tax allowance system, families with low income will not receive any financial assistance for their children because they pay no taxes. The cost of children can be measured with the concept of (udult) rquivulrnce scale, generally defined as the cost of reaching a given level of utility under differen