Welfare analysis of tax reforms using household data

This paper discusses a methodology for calculating the distribution of gains and losses from a policy change using data for a large sample of households. Estimates are based on the equivalent income function, which is money metric utility defined over observable variables. This enables calculations to be standardised and a computer program to compute the statistics presented in the paper is available for a general demand system. Equivalent income is related to measures of deadweight loss, and standard errors are computed for each of the welfare measures. An application to U.K. data for 5,895 households is given which simulates a reform that involves eliminating housing subsidies.