municipalities seems very high and varies a lot for several reasons (commercial area, industrial etc.).

- (iv) Land area information was not available to estimate the annual rental value of the property.

- (v) Informality in the payment of property tax. To overcome this limitation, the model applied proportional downscaling to match the effective property tax rate in the administrative data (relative to consumption).

# **9.2.2 Indirect taxes**

# **The main limitations for the VAT model are:**

- (i) We assume households purchase goods and services in the same region where they live.

- (ii) There is no place of purchase variable nor a secondary study on consumption informality for the West Bank and Gaza.

- (iii) We only applied indirect effects from VAT to West Bank residents.

To address the second limitation, we used estimations of consumption informality by decile based on an average from 10 similar countries (available in Bachas et al. 2020).

**In the case of customs duties, the major challenge is that we do not have an “imported” dummy in the PECS (a limitation of most household budget surveys).** To address this limitation, we assume the “Law of One Price”—that is, that prices of domestic goods converge to prices of similar imported goods. In applying the Law of One Price for simulating customs duties, we could overestimate the incidence of this tax, particularly if there are price differences between similar domestic and imported products and if poor or rich households have different consumption patterns between domestic and imported products. However, sensitivity analysis conducted for other fiscal incidence studies shows that alternative methods are likely to yield similar results.<sup>79</sup>

**Lastly, we assumed that Gaza residents are not paying indirect taxes.** We could be underestimating the tax burden for Gaza residents if they do pay informal taxes to the _de facto_ authorities, or if indirect effects of taxation from using taxed production inputs from the West Bank affect Gaza residents.

# **9.2.3 Indirect subsidies**

**The main limitation to the estimation of the electricity subsidy is lack of administrative data on “average cost of supply” of electricity by DISCOs to the domestic consumers.** Data is also not available on distribution margin of the DISCOs. Additionally, the PECS only provides the information about the “electricity charges” paid by the households. It does not provide the information about the “type of meter” households have. The application of “incremental block Tariff” is based on the type of meter. In the absence of this information, it is assumed that electricity tariff is volumetric.

> 79 In a fiscal incidence analysis of Benin in 2018 the authors model customs using two different assumptions: in the baseline they assume that domestic and imported goods are differentiated enough (in terms of quality and type of good within IO sector) to prevent price convergence, while as a sensitivity analysis they assume that domestic and imported goods belong to the same IO subsector and are of similar levels of quality, such that the Law of One Price (LOOP) applies. (Goldman et al., 2022). They find little difference in the results of the two methods, with a slight increase in the Kakwani Index from 5.7 to 5.8 with the LOOP assumption, no change in the marginal contribution to inequality of 0.2, and a slightly greater marginal poverty increase decrease in the marginal contribution to poverty reduction from –1.9 to –2.0 (i.e., a larger poverty increase).

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