# **Assumptions**

We assume that the economic incidence of direct taxes and contributions are borne entirely by the income earner. Personal income taxes (PIT) and employee social security contributions across households are in general directly identified in the household survey. However, they were also imputed according to the tax legislation and contribution rules as detailed in Appendix 1, in order to allow for simulations of different scenarios. In all cases, minimum employer contribution rates were assumed – in practice employer contribution rates are differentiated by economic activity and working conditions but this information is not available in the household survey. Statutory rates are used throughout the analysis. To the extent that informality in the payment of PIT and social contributions is high in Romania, the distributional impacts could differ, and the analysis is closer to an analysis of the de jure impact of policies. The analysis could further be refined under alternative scenarios on informality.

Social contributions are simulated only for individuals who reported that these were paid (either by employers in the case of wage workers or by themselves in the case of self-employed).

The burden of indirect taxes is assumed to be borne entirely by the consumer. The burden of indirect taxes was estimated by first applying statutory rates to each item in the detailed consumption data in the HBS. However, given informality in consumption taxes, we calculate the effective tax rate for VAT (calculated as total VAT collections divided by total private household consumption) and adjust the VAT rate until the ratio of total tax collections observed in the household survey relative to household private consumption matches the effective rate observed in the National Accounts. Similarly, for excise taxes, we apply statutory rates to consumption of alcohol, tobacco, fuel and energy identified in the HBS to estimate the direct burden of these excises on households.

On the spending side, the HBS provides detailed information on who received payment from contributory and non-contributory social protection programs. In terms of contributory benefits, old-age, family, unemployment, and disability benefits are identified in the survey. In terms of non-contributory benefits, a large number of benefits are directly identified, including the guaranteed minimum income, social pensions, heating aid, disability, scholarships and family benefits including the state allowance for children, the support allowance for children, and the placement allowance for children, and many smaller cash and nearcash programs. All are directly identified in the survey. Since these benefits are not taxable, the reported value can be directly used.

The approach to estimate the incidence of public spending on education followed here is the so-called “benefit or expenditure incidence” or the “government cost” approach. In essence, we calculate per beneficiary input costs by level of education from government spending and the number of pupils in each level and assign the per pupil expenditure to each student. This approach is also known as the “classic” or “non-behavioral approach”, and it amounts to asking the following question: how much would the income of a household have to be increased if it had to pay for the free or subsidized public service at the full cost to the government?

Since the education system is mostly public at all levels of education in Romania and there is no evidence of wide-spread opting-out of public education, benefits were assigned to households according to the 11