increasing the progressivity of the VAT (Bachas et al., 2020). While the PECS 2016/17 does not have a place of purchase variable to proxy households’ consumption informality, this study imputed average consumption informality by decile based on estimates from similar countries available in Bachas et al. (2020). We calculated the indirect effects of the VAT for the West Bank region using the 2017 Input-Output table and the Cost-Push Model (Inchauste and Jellema 2018, Inchauste et al. forthcoming).<sup>51</sup>

## **4.4.3. Excises**

**We model the fuel excises for gasoline, diesel, and kerosene** . Consistent with previous indirect taxes’ assumptions. We only simulate fuel excises in the West Bank, whereas we assume individuals in Gaza pay zero excises. The model of excises does not account for households’ consumption informality given that fuel products are typically not prone to tax evasion.

## **The simulation of fuel excises followed these steps:**

- (i) Mapped excise rates to relevant fuel products in the PECS 2016/17. Given data limitations, the model uses 2017 fuel excise rates from the Israeli Tax Authority<sup>52</sup> ; this is a plausible assumption since the excise rates from the Palestinian Territories and Israel are similar to avoid arbitrage between both countries.

- (ii) Prepared the Augmented IO Matrix for the West Bank<sup>53</sup> and mapped IO sectors (fuel products) to relevant excise rates. Also, all IO sectors were mapped to the associated final goods (COICOP codes) from the PECS.

- (iii) Excluded non-taxable categories such as self-production and gifts from the PECS 2016/17 consumption dataset.

- (iv) Calculated indirect effects of fuel excises based on the Augmented IO Matrix for the West Bank and the Cost-Push Model (Inchauste and Jellema, 2018). The model applies the price shock of fuel excises (differentiated for gasoline, diesel, and kerosene) to the petroleum input sectors; output sectors that have used petroleum products as an input will carry indirect effects from fuel excises.

- (v) Calculated direct effects based on (estimated) quantities of gasoline, diesel and kerosene consumed by households in the West Bank and the fuel excise rates for each product. Quantities were estimated based on households’ self-reported expenditure in gasoline, diesel and kerosene divided by each products’ prices in 2017 (differentiate by region).<sup>54</sup> As explained above, Israeli fuel excise rates (2017) were applied for gasoline, diesel and kerosene quantities.

- (vi) Applied indirect effects of fuel excises in the PECS 2016/17 to all households’ products that have used petroleum as a production input.

# **4.5. Indirect subsidies**

## **4.5.1. Domestic electricity**

**Estimation of the electricity subsidies to the domestic consumers is based on the applicable tariff structure (Table 4-2) and estimated cost of supply.** There was no data available on the cost of electricity

> 51 See Inchauste and Jellema (2018), for an explanation of the methodology on indirect effects and the Cost-Push Model.

> 52 The 2017 (Israeli) excise rates used in the model were: gasoline (2.89 NIS/L), diesel (3.02 NIS/L) and kerosene (2.89 NIS/L). 53 The IO sector of “Petroleum products” was disaggregated between “gasoline”, “diesel” and “other oils” based on consumption shares calculated using the PECS 2016/17.

> 54 Fuel prices (2017) are differentiated for residents between East Jerusalem and West Bank.

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