The team also took from the 2015 Annual Economic Report the government’s expenditures on electricity, fuel subsidies, the Farmer Input Support Program (FISP), and in-kind health care and education transfers. The team scaled these subsidies and in-kind transfers to equal the scaling of taxes. The Social Cash Transfer (SCT) program’s 2015 expenditures as well as the SCT 2015 beneficiary total were provided by the Ministry of Community Development and Social Welfare. The team found that total SCT expenditures allocated among LCMS households were approximately equal to confirmed expenditures, and the average transfer per household is approximately equal to the number of confirmed SCT expenditures divided by the number of confirmed SCT recipients. Thus, the total amount of direct transfer expenditures allocated is not scaled in the way that the other fiscal policy elements described above are.

# Allocation Overview

When and where possible, the study allocates fiscal policy elements to individuals or households based on direct observation. For example, when an individual queried in a socioeconomic survey is asked to recall how much she has paid in VAT on all her purchases in the last seven days, or is asked to provide receipts detailing VAT payments, the team directly “observes” the total VAT collection from her. These VAT payments recorded by individuals then are assumed to be the same VAT revenues listed in the executive, administrative, and other budget reporting for the same year.

In Zambia’s LCMS, however, very few fiscal policy elements could be allocated via direct observation.<sup>24</sup> Instead, the study uses imputation and simulation (sometimes in combination with direct observation). _Imputation_ is used when a survey unit’s benefit recipient (taxpayer) status must be inferred (rather than directly identified), or the amount received (paid) is retrieved from administrative records or program (tax) rules (rather than directly recorded in the survey); or both. _Simulation_ is available when neither direct identification nor imputation can be used, so that the beneficiaries (taxpayers) and the amount received (paid) are simulated based on the program (tax).<sup>25</sup> The subheadings below provide a summary of allocation assumptions and decisions for various fiscal policy elements in this study.

# _Personal Income Taxes_

Direct (personal income tax) taxpayer status is imputed based on a simple sum of “0/1” indicators that describe the level of formality in an individual’s participation in the labor market, whether the same individual makes social security contributions, and whether the individual makes pension contributions. For LCMS households with at least one individual imputed to be a taxpayer, the household tax burden is simulated according to the statutory marginal personal income tax rate schedule. The individual’s total personal income tax burden is scaled down. The goal is that the total personal income taxes collected from LCMS households relative to the total value of consumption expenditure in the LCMS, are found to be equivalent to the total personal income tax collections in budget documents relative to the value of total final household consumption expenditure in the national accounts.

Among the set of likely taxpayers in the LCMS, we replicated the distribution of the concentration shares of PAYE taxes paid according to administrative records from the Zambian Revenue Authority (ZRA). That is, we had actual, anonymous taxpayer records from the ZRA which allowed us to calculate the rank position of all taxpayers (according to their total taxes paid) and their concentration shares of taxes paid. We then re-created that distribution within our set of likely LCMS taxpayers, so that, for example, the top

> 24 Access to publicly delivered health and education services is observed directly as is the purchase of subsidized fuels and electricity. However, the subsidy received for transactions in these services and goods must be imputed or simulated.

> 25 _Imputation using secondary sources_ is used to improve the validity of an imputation of beneficiary or taxpayer status in the LCMS by taking confirmed demographic or regional (or other) characteristics of beneficiaries (taxpayers) from a secondary source and replicating the distribution of those characteristics in the imputed beneficiary LCMS population. For a detailed description of these and other allocation methods, see Higgins and Lustig 2017.

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