food items and assume all non-food consumption is from domestic goods with the exception of cars, which are all imported in Bhutan.

Excise is levied on all domestically manufactured alcoholic beverages. The government also collects fees for liquor exports and excise permit fees for the import of beer, however, these are not included in our analysis. Since the survey does not cover information on the brand of liquor consumed by households, we apply a simple average of excise tax rates of the three brands to all liquor.<sup>22</sup> Both direct and indirect effects are included in the calculation of total indirect taxes. The direct effect refers to the effect on final goods, which is the loss in purchasing power that the households experience due to consumption taxes. The indirect effect (also called cascading effect) is the effect of taxes on the purchase of intermediate goods, which captures how the taxes on inputs affect the price of final consumption goods. Using an Input-Output matrix<sup>23</sup> and a price-shifting model (also called cost-push model) (Gillingham, 2008), we quantify the magnitude of sectoral changes in retail prices resulting from taxes on inputs, which is the burden of taxes that are “pushed forward” to the household due to the cascading effect in the tax system. We assume constant returns to scale, perfect competition, and reproducible fixed factors of production (Lustig, 2018).

# **_In-kind transfers_**

In Bhutan, the main in-kind transfers are education and health services that are provided for free by the government. To allocate a monetary value to the in-kind benefits received by the household, we follow the CEQ assessment approach (Lustig et al. 2018) by using the production cost of the government. The unit cost is calculated as total public spending divided by the total number of beneficiaries and allocated to households after taking into account the number of beneficiaries in the household. This constitutes the value of in-kind transfers.

For education transfers, we identify the per beneficiary public spending using total education spending at primary, secondary and tertiary levels for two types of schools—boarding and day school—divided by the number of enrollees for each level and type of education. The beneficiaries are identified using survey questions on school enrollment. For health transfers, we employ an insurance value approach by assigning the same per capita spending to everybody sharing the same characteristic such as age, state, type of care, gender, rural/urban etc., with the assumption that the probability a person gets access to these services is the same as that prevailing for others with the same characteristics.

# **_Education_**

Beneficiaries are identified based on information on the household member’s level of school (from primary school to college), ownership of school (public or private), location of school (in Bhutan or overseas) and the type of school (boarding school or day school). Only students attending public schools in Bhutan are

> 22 This average excise tax rate is consistent with the tax rate calculated for the overall liquor revenues and taxes in NSB (2014), “Alcohol Use and Abuse in Bhutan”.

> 23 The Bhutan Input-Output matrix is obtained from Asian Development Bank (2018), “Economic Indicators for South and Central Asia—Input-Output Tables”.

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