On income transfers and equivalence scales

This article focusses on the relations between equivalence scales and income transfers linked to household characteristics, also called demogrants. Since transfer payments have to be financed, the relation is analyzed in the framework of an optimal tax model. The - in a second-best sense - optimal demogrants and optimal marginal tax rate are characterised by their first-order conditions. Some general properties of the demogrant structure are derived and discussed. Finally, an adopted version of Stem's model for the numerical calculation of optimal taxes is used to obtain more explicit indications about how different factors affect the structure of demogrants and the marginal tax rate.