The Use of Splines on the Working-Leser Engel Equation

Abstract

This study estimates total expenditure elasticities for the poor, middle income and rich Australian households using Spline functions on the Working-Leser Engel equations system. These elasticities vary substantially with the level of total expenditure. In the light of these results, the traditional argument which proposes that a tax imposed on a good that has an income elasticity greater than one, affects mostly the rich income households, needs to be generalised. If, for example, the elasticity declines with income and becomes less than one somewhere along the middle income range, the correct proposition would be that the tax is progressive for poor to middle income households and it is regressive for the rich households.