Estimation of AIDS demand systems for Greece, with applications to the welfare effects of the EEC: harmonisation of alcohol and tobacco taxes

Abstract

Estimation of an aggregate Almost Ideal Demand System including distributional effects allows the recovery of individual household'spreferences and provides the basis for an empirical analysis of the welfare effects of changes in indirect taxes with special referenceto the recent EEC proposals of fiscal harmonisation. More specificaly we are concerned with the welfare effects of harmonizing the alcohol and tobacco indirect taxes (value added tax and excise duties) for Greek consumers. Hence we calculate the distribution of gains and losses from these tax change using the equivalent income function which is money metric utility defined over observable variables. It is suggested that it could contribute in worsening the situation for the low-income groups. However the distributional consequences would depend on the nature of compensatory measures to protect the living standards of poorer households. The Ideal Demand System is also estimated without demographic effects using annual Greek data over the period 1960 -1987.