Information on direct and indirect taxes, transfers in cash and in-kind, and subsidies cannot always be obtained directly from the IES. When it can be obtained, we call this the _direct identification method._ When the direct identification method is not feasible, one can use the inference, simulation, or imputation methods, or an alternate source. As a last resort, one can use secondary sources. The methods one can use to allocate taxes and transfers are described in detail in Lustig and Higgins (2013). The method used for each category of taxes and transfers in our study can be found in Appendix 1. A summary of the main assumptions follows:

1. The IES does not provide information on personal income taxes or payroll taxes like the Skills Development Levy and contributions to the Unemployment Insurance Fund. Thus, the burden of these had to be simulated. Consistent with other conventional tax incidence analyses, we assume that the economic burden of direct personal income taxes is borne by the recipient of income. The burden of payroll taxes is assumed to fall entirely on workers.

2. In contrast, the IES provides detailed information on the receipt of cash transfers. The number of beneficiaries implied by the survey receiving old age, child, disability and foster benefits aligns well with the figures provided by administrative fiscal data (National Treasury, 2014).

3. The IES also provides detailed consumption data that allows us to estimate the burden of VAT, the Fuel Levy, and specific excise duties on alcohol and tobacco. Consumption taxes are assumed to be shifted forward to consumers. (See Appendix 1 for details on all assumptions taken). Evasion of consumption taxes was taken into account implicitly by using “effective” rates (i.e., collected tax as a share of total consumption of that good according to national accounts) rather than statutory rates. In the case of excise on alcohol and tobacco, the survey severely underestimates actual consumption relative to what is recorded in the National Accounts. To correct for this, we assume that the extent of under-reporting is consistent across the income distribution, i.e. we assume that the survey provides the correct distribution of spending on alcohol and tobacco, but that the levels of spending are too low.<sup>29</sup> Finally, we use the 2009 Input-output Matrix and a price shifting model<sup>30</sup> to estimate the second round effects of indirect taxes, whereby these taxes result in higher costs in sectors that use these goods as inputs. For VAT, the indirect effects are only considered in the case of exempt items, since VAT refunds ensure that there is no cascading of nonexempt items.

4. In South Africa consumption subsidies are relatively small except for the “free basic services” provided by some municipal governments. However, a lot of municipalities essentially treat these free services as a direct transfer to households. In most of this paper, these services are considered a transfer in our baseline scenario, but we also present an alternative scenario where these services are treated as an indirect subsidy.<sup>31</sup> 5. The approach to estimate the incidence of public spending on education and health followed here is the so-called “benefit or expenditure incidence” or the “government cost” approach. In essence, we use per beneficiary input costs obtained from administrative fiscal data (disaggregated by province and type of the bottom of the distribution. The survey uses a combination of the diary and recall methods to calculate total household consumption. As is often the case with survey based on diary and recall methods that run over extended periods there is a risk that income and consumption is underestimated. In addition, the survey does not separately identify own-produced goods, which could lead to underreporting of consumption at the bottom of the distribution and could account for at least part of the gap in the share of food in the consumption basket of the poor relative to what surveys report in other countries. Finally, as in other countries, there are questions about the ability of a survey of this type to collect adequate information on households at the top of the distribution. One area for further research would be to try alternative methods to simulate the top of the distribution to try to correct for this.

> 29 The ratio of the value of IES consumption on alcohol is only 17 percent of total sales reported by the Reserve Bank of South Africa due to a very large number of households reporting zero amounts of alcohol and/or tobacco consumption. Although previous fiscal incidence analysis done for South Africa used similar scaling assumptions as the ones used here, the results were mixed, with excise duties found to be quite regressive in 1995 but almost neutral in 2000 (Woolard et al, 2005). Although it is true that we could be overestimating the incidence of excises at the bottom of the distribution due to this scaling, it is also the case that we apply the same excise tax regardless of the quality of the alcoholic beverage or tobacco product, which could underestimate excises at the top of the distribution.  See Appendix 1 for details.

> 30 See Coady (2008) for a description of the price shifting model and Appendix 2 for a description of the approach.

> 31 Full results under the alternative scenario are available upon request.

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