The Distributional Impact of Taxes and Transfers in Romania Impact of Policies in Romania (June...

The Distributional Impact of Taxes

and Transfers in Romania

Gabriela Inchauste and Eva Militaru

June 12, 2018

Studies find that direct taxes and benefits do less to reduce

inequality in Romania than in other EU countries:

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Bu

lgar

ia

Lit

hu

ania

Est

on

ia

Gre

ece

Cy

pru

s

Lat

via

Po

lan

d

Mal

ta

Slo

vak

ia

Ital

y

Cze

ch R

epu

bli

c

Cro

atia

Ro

man

ia

Hu

ngar

y

Sp

ain

EU

-28

Sw

eden

Fra

nce

Ger

man

y

Po

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Slo

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ia

Au

stri

a

Fin

lan

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Net

her

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Den

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Bel

giu

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Un

ited

Kin

gd

om

Irel

and

Dec

lin

e in

Gin

i p

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ts

Redistributive impact of direct taxes, transfers and pensions, 2016

Means tested benefits Non-means tested benefits Direct taxes Social contributions

Source: Euromod microsimulations of 2016 policies

However, existing analysis has not yet

included the impact of indirect taxes.

Source: World Bank staff based on Ministry of Finance

Personal income

tax, 12.4%

Social security

contributions, 27.4%

VAT, 23.1%

Excises, 12.0%

Customs duties,

0.4%

Other taxes,

6.1%

Nontax revenue,

8.0%

Grants, 3.3%

Corporate tax,

6.9%

Romania. Composition of General Government Revenue, 2016

(percent of total revenue)

Similarly, spending on in-kind benefits

have not been included.

Contributory benefits,

26.6%

Non-contributory

benefits, 4.3%

Education, 9.0%

Health, 12.5%Subsidies, 2.7%

Other expenditures,

44.9%

Romania. Composition of General Government Spending, 2016

(percent of total expenditure)

Source: World Bank staff based on Ministry of Finance

A proposed approach:

The Commitment to Equity Approach (CEQ)

• What is the impact of taxes/transfers on poverty and inequality?

• How effective are taxes/transfers in reducing poverty/inequality?

• Who benefits from spending and who bears the burden of taxes?

identify potential areas for reform.

This approach is based on the methodology and findings of the

Commitment to Equity project (CEQ) led by Nora Lustig, Professor of

Economics at Tulane University. www.commitmentoequity.org

http://www.commitmentoequity.org/

Key assumptions on revenue components

• The HBS provides information on income from employment,

self-employment, income from capital, private transfers, imputed

rent for owner occupied housing, etc.

• Most direct taxes, individual social security contributions and

personal income tax can be directly identified in the survey

• Those that are missing have been imputed based on tax and

social security contribution legislation

• Net wages and net pensions are recorded in the survey database,

while gross wages and gross pensions had to be imputed based

on personal income tax and social contributions rules.

Key assumptions on revenue components

• Employer social security contributions are imputed by

applying statutory rates on the estimated gross wages.

• The minimum contribution rates have been considered –

in practice contribution rates are differentiated by

economic activity and working conditions.

• Indirect taxes are estimated based on statutory rates applied

on detailed consumption data from the HBS:

• for VAT – the standard rate and reduced rates,

• for excises – the statutory rates for tobacco, alcohol, fuel

and energy.

6/13/2018

We analyze 75% of total revenue, including 85% of tax

revenue and nearly 100% of social contributions

(in millions

of lei) % of GDP

(in millions

of lei) % of GDP

Revenue 223,722 29.3% 167,663 22.0%

Taxes 197,681 25.9% 167,663 22.0%

Corporate tax 15,442 2.0%

Personal income tax 27,756 3.6% 27,756 3.6%

VAT 51,675 6.8% 51,675 6.8%

Excises 26,957 3.5% 26,957 3.5%

Customs duties 883 0.1%

Social security contributions 61,274 8.0% 61,274 8.0%

Other taxes 13,693 1.8%

Nontax revenue 17,938 2.4%

Capital revenue 769 0.1%

Grants 1/ 7,332 1.0%

Source: National Institute of Statistics, Ministry of Public Finance, MFMod, World Bank staff estimates

1/ Includes -financed capital projects

Fiscal Accounts

Portion of Fiscal

Accounts to be analyzed

Key assumptions on spending

components• Detailed data on social benefits received by households is provided in the HBS - this

was used for direct identification of beneficiaries and net amounts received.

• For public spending on education we used the government cost approach:

• based on government spending and number of pupils by level of education we

estimated the public spending per pupil by educational level and assigned the

values to those enrolled in education.

• As for the public spending on health we used the cost of insurance approach:

• we estimated the individual benefit (minimum and basic) based on administrative

data on spending for health services taken from the health insurance budget and

number of beneficiaries of basic and minimum packages, and assigned the

corresponding value to each individual

• Identification of individuals as beneficiaries of basic or minimum package takes

into account their relationship with the health insurance system (insured with

contribution paid, other categories insured without contribution due, not insured)

and the health insurance legislation

We analyze

52% of total

expenditures,

including

91% of social

spending.

(in

millions

of lei)

% of

GDP

(in millions

of lei)

% of

GDP

Expenditure 242,016 31.7% 126,594 16.6%

Social Protection 86,719 11.4% 74,651 9.8%

Contributory benefits 64,293 8.4% 64,287 8.4%

Pensions 59,817 7.8% 59,817 7.8%

Unemployment benefit 498 0.1% 498 0.1%

Indemnity for temporary work incapacity 953 0.1% 953 0.1%

Contributory family benefits 3,019 0.4% 3,019 0.4%

Maternity allowance 695 0.1% 695 0.1%

Child raising allowance 2,060 0.3% 2,060 0.3%

Child raising incentives 264 0.0% 264 0.0%

Other contributory programs 6 0.0%

Non-contributory benefits 10,399 1.4% 10,364 1.4%

Noncontributory family allowances 5,111 0.7% 5,111 0.7%

State allowance for children 4,416 0.6% 4,416 0.6%

Support allowance: families w/children 526 0.07% 526 0.1%

Placement allowance for children 169 0.0% 169 0.0%

Minimum social pension 917 0.1% 917 0.1%

Guaranteed minimum income 812 0.11% 812 0.1%

Heating aid 149 0.0% 149 0.0%

Disability benefits 2,297 0.3% 2,297 0.3%

Scholarships 971 0.1% 971 0.1%

Other indemnities 109 0.0% 109 0.0%

Other social benefits 34 0.0%

Other Social Protection spending 12,027 1.6%

Education 21,678 2.8% 21,678 2.8%

Health 30,265 4.0% 30,265 4.0%

Subsidies 6,605 0.9%

Other expenditures 96,750 12.7%

Source: National Institute of Statistics, Ministry of Public Finance, MFMod, World Bank staff estimates

1/ Includes -financed capital projects

Fiscal Accounts

Portion of Fiscal

Accounts to be

analyzed

ROMANIA 2016.

Impact of taxes and transfers on

inequality and poverty

Includes 75% of all revenues and 52% of total spending

Overview

• The aim is to include main tax items 75% of revenue (85% of taxes and

contributions) in 2016

• Social security and health insurance contributions, personal income tax, value-added

tax, and specific excise duties.

• The aim is to include most social spending 52% of total spending (nearly all

social spending) in 2016

• Contributory benefits (old-age, unemployment and family benefits), non-contributory

direct cash and near-cash transfers (child allowances, guaranteed minimum income,

heating allowance, minimum social pension, disability benefits, scholarships) as well

as health and education spending

• Impact of taxes and social spending on inequality and poverty in 2016

• Analysis of each fiscal intervention (progressivity and marginal contributions)

• Simulations of recent and proposed changes

The social protection system reduces inequality, as do

in-kind transfers…

- Direct

taxes +

direct

transfers

- indirect

taxes

+ indirect

subsidies

Source: World Bank estimates based on

Romania HBS (2016).+

education

+ health

0.487

0.378

0.3340.340

0.310

0.25

0.30

0.35

0.40

0.45

0.50

Market Income Disposable Income Consumable Income Final Income

Romania. Gini Coefficient, 2016

Old-age pensions as transfers

Old-age pensions as deferred income

...more so than in other countries.

Source: World Bank estimates based on Romania HBS (2016), Poland (Inchauste & Goraus 2017), Croatia (Inchauste &

Rubil), Russia (2010). Estimates for United States (Higgins et al., 2016), Argentina (Rossignolo, 2018) are available at

Commitment to Equity Institute Data Center on Fiscal Redistribution.

Poland

Croatia

Romania

RussiaUnited States

Argentina

0.25

0.30

0.35

0.40

0.45

0.50

Market income plus

pensions

Disposable income Consumable income Final income

Emerging markets: Gini Coefficient

(pensions as deferred income)

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0A

rgen

tina,

20

12

-13

South

Afr

ica,

201

0-1

1

Pola

nd

, 2

01

4

Geo

rgia

, 2

01

3

Bra

zil,

200

8-0

9

Unit

ed S

tate

s, 2

01

1

Cost

a R

ica,

20

10

Uru

guay

, 20

09

Cro

atia

, 20

14

Iran

, 2

01

1-1

2

Mex

ico

, 2

01

0

Tunis

ia, 2

01

0

Chil

e, 2

01

3

Ecu

ador,

20

11

-12

Colo

mbia

, 2

01

0

Rom

ania

, 2

01

6

Russ

ia, 2

01

0

Ven

ezu

ela,

20

12

Boli

via

, 2009

Dom

inic

an R

ep., 2

00

6-0

7

Tan

zania

, 20

11

-12

Par

aguay

, 2

014

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arag

ua,

20

09

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enia

, 20

11

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Sal

vad

or,

20

11

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u, 2

009

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a, 2

01

2-1

3

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da,

2012-1

3

Sri

Lan

ka,

200

9-1

0

Hond

ura

s, 2

01

1

Indones

ia, 2

01

2

Guat

emal

a, 2

01

1

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an, 2

01

0-1

1

Eth

iopia

, 2

01

0-1

1

Chan

ge

in G

ini

Pensions as deferred income Pensions as transfers

The overall redistributive effect is relatively large, and in

line with other countries in the EU.

Direct taxes were slightly progressive and

equalizing in Romania in 2016, …

0.000

0.005

0.010

0.015

0.020

0.025

0.030

0.035

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Gu

atem

ala

(2010

)

Colo

mbia

(2

014

)

Sri

Lan

ka

(201

0)

El

Sal

vad

or

(201

1)

Per

u (

20

09)

Jord

an (

20

10)

Russ

ia (

20

10

)

Rom

ania

(2

016

)

Pola

nd (

20

14)

Mex

ico (

2010

)

Bra

zil

(20

09)

Chil

e (2

00

9)

Arm

enia

(2

011

)

Geo

rgia

(201

3)

Cro

atia

(2

014

)

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th A

fric

a (2

010

) Mar

gin

al c

on

trib

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o e

qu

ity

(ch

ang

e in

Gin

i p

oin

ts)

Kak

wan

i In

dex

Reg

ress

ive

<--

----

----

----

----

> P

rog

ress

ive

Redistributive impact of Direct taxes

Kakwani Marginal contribution

Source: Armenia: Younger et al (2016); Bolivia: Paz Arauco et al (2014); Brazil: Higgins & Pereira (2014); Chile: Martinez et al (2017);

Colombia: Melendez (2014); El Salvador: Beneke et al., (2014); Georgia: Cancho & Bondarenko (2016); Mexico: Scott (2014); Peru:

Jaramillo (2013); Poland: Goraus & Inchauste (2016); Russia: Lopez-Calvo et al (2016); Sri Lanka: Arunatilake et al (2016); South Africa:

Inchauste et al (2016); Uruguay: Bucheli et al (2014); Croatia: Inchauste & Rubil (2017); Romania: own estimates using HBS 2016.

…with PIT being the most progressive and

redistributive.

Source: World Bank estimates based on Romania HBS (2016).

0.000

0.002

0.004

0.006

0.008

0.010

0.012

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Per

sonal

inco

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tax

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em

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em

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em

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g <

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effi

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ress

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<--

----

--->

Pro

gre

ssiv

e

Progressivity and Redistributive Effect of Direct Taxes and Contributions

(from market to disposable income)

Kakwani Coefficient Marginal Contribution

Means-tested benefits are concentrated at the bottom

of the distribution.


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Un

emp

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ben

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Dir

ect

tran

sfer

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Contributory Non-contributory

Romania. Concentration of Social Protection Programs

(by market income plus pensions quintiles)

Poorest 2 3 4 5 6 7 8 9 Richest

Direct transfers and benefits were progressive and

redistributive, although some programs were better

than others.


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0.002

0.004

0.006

0.008

0.010

0.012

0.00

0.20

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<--

----

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gre

ssiv

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Redistributive Impact of Direct Transfers and Benefits

(from market to disposable income)


-0.035

-0.030

-0.025

-0.020

-0.015

-0.010

-0.005

0.000

0.005

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

Cro

atia

(2

01

4)

Geo

rgia

(2

01

3)

Po

lan

d (

20

14)

Bo

liv

ia (

20

09

)

Rom

ania

(2

01

6)

Guat

emal

a (2

01

0)

Russ

ia (

20

10

)

Indones

ia (

2012)

Colo

mbia

(2

014

)

Jord

an (

20

10

)

Bra

zil

(20

09

)

Arm

enia

(2

01

1)

El

Sal

vad

or

(201

1)

Sri

Lan

ka

(20

10

)

South

Afr

ica

(20

10

)

Ch

ile

(20

13)

Mex

ico

(2

01

0)

Mar

gin

al c

ontr

ibuti

on to e

quit

y

(ch

ange

in G

ini

poin

ts)

Kak

wan

i In

dex

Reg

ress

ive

<--

----

----

----

----

> P

rogre

ssiv

e

Redistributive Impact of Indirect Taxes


In contrast, indirect taxes were regressive and

un-equalizing, ...

Source: Armenia: Younger et al (2016); Bolivia: Paz Arauco et al (2014); Brazil: Higgins & Pereira (2014); Chile: Martinez et al (2017);

Colombia: Melendez (2014); El Salvador: Beneke et al., (2014); Georgia: Cancho & Bondarenko (2016); Mexico: Scott (2014); Peru:

Jaramillo (2013); Poland: Goraus & Inchauste (2016); Russia: Lopez-Calvo et al (2016); Sri Lanka: Arunatilake et al (2016); South Africa:

Inchauste et al (2016); Uruguay: Bucheli et al (2014); Croatia: Inchauste & Rubil (2017); Romania: own estimates using HBS 2016.

…particularly the VAT, which was regressive and

contributed to an increase in inequality.


-0.010

-0.005

0.000

0.005

0.010

0.015

0.020

0.025

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

All

dir

ect

taxes

All

contr

ibuti

ons

All

dir

ect

taxes

and c

ontr

ibuti

ons

VA

T

Exci

ses

tobac

co

Exci

ses

alco

hol

Ex

cise

s fu

el

Exci

ses

ener

gy

All

ind

irec

t ta

xes

All

tax

es

All

tax

es a

nd

contr

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on

s

Red

istr

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ve

effe

ct

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ual

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g <

----

--->

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g

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wan

i co

effi

cien

t

Reg

ress

ive

<--

----

--->

Pro

gre

ssiv

e

Progressivity and Redistributive effect of Taxes and Contributions

(from market to consumable income)


Moreover, indirect taxes were also poverty increasing in

2016…


0.04

-0.01 -0.01

-0.02-0.02

-0.010.00 0.00

0.00

-0.03-0.04

-0.03

-0.02

-0.01

0.00

0.01

0.02

0.03

0.04

0.05

Dir

ect

tran

sfer

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cl c

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All

dir

ect

taxes

All

contr

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All

dir

ect

taxes

and c

ontr

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ons

VA

T

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ses

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co

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ses

fuel

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indir

ect

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Contr

ibuti

on t

o P

over

ty R

educt

ion

(Chan

ge

in p

over

ty h

eadco

unt

at U

S$5.5

0 P

PP

) Marginal contributions to Poverty Reduction

(from market to consumable income)

..such that while direct taxes and transfers reduced

poverty, indirect taxes led to an increase in the poverty

headcount rate,…


13.9

5.3

22.822.5

9.0

36.2

12.1

4.3

20.1 21.8

9.0

35.0

15.4

6.2

24.927.5

12.5

42.8

0

5

10

15

20

25

30

35

40

45

All Urban Rural All Urban Rural

US $5.50 PPP 60% of median disposable income

Romania. Poverty Headcount Rate, 2016

Market income + pensions Disposable income Consumable income

The impact of indirect taxes on poverty was particularly

large among households with children.


1.9

27.5

2.5

7.6

18.1

61.5

0.1 0.31.3

21.3

3.1

8.4

21.7

65.5

0.1 0.20

10

20

30

40

50

60

70

Single adults Single parent

households

Couples without

children

Couples with 1

child

Couples with 2

children

Couples with 3+

children

Single retirees Couple of

retirees

Romania. Poverty Headcount Rate by Type of Household, 2016


Health and education spending are progressive and

redistributive; particularly secondary education and the

basic health package...


-0.005

0.000

0.005

0.010

0.015

0.020

0.025

0.030

0.035

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20D

irec

t ta

xes

an

d c

on

trib

uti

on

s

Dir

ect

tran

sfer

s

Ind

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In-k

ind t

ransf

ers

Pre

schoo

l

Pri

mar

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Lo

wer

sec

ond

ary

Up

per

sec

ond

ary

Post

-sec

on

dar

y

Ter

tiar

y

Ed

uca

tio

n i

n-k

ind b

enef

its

Min

imum

hea

lth p

ackag

e

Bas

ic h

ealt

h p

ackag

e

Hea

lth i

n-k

ind b

enef

its

Red

istr

ibuti

ve

effe

ct

Un

equ

aliz

ing

<--

----

-> E

qu

aliz

ing

Kak

wan

i co

effi

cien

t

Reg

ress

ive

<--

----

--->

Pro

gre

ssiv

e

Redistributive Effect of Taxes and Social Spending

(from market to final income)


…although not all education and health spending is

pro-poor…


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%P

resc

ho

ol

Pri

mar

y

Low

er s

econdar

y

Upper

sec

ondar

y

Post

-sec

ondar

y

Ter

tiar

y

Net

educa

tion t

ransf

ers

Min

imum

hea

lth b

enef

it

Bas

ic h

ealt

h b

enef

it

Net

hea

lth t

ransf

ers

In-kind education In-kind health


… and the redistributive power of primary education is

relatively low.

0.000

0.005

0.010

0.015

0.020

0.025

0.030

0.035

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Rom

ania

(2

016

)

Arm

enia

(2

011

)

Eth

iopia

(2

011

)

Cro

atia

(2

014

)

Ind

ones

ia (

201

2)

Jord

an (

20

10)

Chil

e (2

01

3)

Pola

nd (

20

14)

Sou

th A

fric

a (2

010

)

Mar

gin

al c

on

trib

uti

on t

o e

qu

ity

(ch

ang

e in

Gin

i p

oin

ts)

Kak

wan

i In

dex

Reg

ress

ive

<--

----

----

----

----

> P

rog

ress

ive

Progressivity and Redistributive Effect of Primary School

(from market to final income)



In cash terms, households beginning in the second decile

were net payers to the treasury in 2016.


-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%


Sh

are

of

Mar

ket

Inco

me

+ P

ensi

ons

All direct taxes Non-pension contributions All Direct Transfers All indirect taxes

Education Health Net cash position Total

ROMANIA 2016-2018

Impact of recent changes in taxes on

inequality and poverty

• Health contributions for pensioners were eliminated in 2017

• PIT was eliminated for pensions below RON 2 000 in 2017

• Social and health contributions are due on all sources of income beginning in 2017

• Adopted Unified Wage Law in 2017 Public wages increased by 25%

• Increase in the Minimum Social Pension in 2017

• Reduced VAT rate from 20 to 19 in 2017, from 19 to 18 in 2018

• Reduced the flat PIT rate from 16 to 10 percent in 2018 and raised the tax-free allowance

• Introduction of a minimum contributory base for part-time worker social contributions in 2018.

The reduction in the PIT flat tax increased inequality,

while VAT reduction had no big impact…


0.300

0.310

0.320

0.330

0.340

0.350

0.360

0.370

0.380

Market Income + Pensions Disposable Income Consumable Income Final Income

Romania. Gini Coeffficient

Baseline Simulation PIT rate=10% & VAT 18%

…however, both changes slightly reduced the overall

poverty headcount rate…


13.9

12.1

15.415.0

11.8

14.8

0

2

4

6

8

10

12

14

16

18


Poverty Headcount Rate

(US$5.50 PPP)

2016 Baseline VAT decline to 18% PIT decline to 10% Decline in both PIT and VAT

A more cost-effective and an redistributive alternative

would have been to increase targeted social transfers


0.300

0.310

0.320

0.330

0.340

0.350

0.360

0.370

0.380

Market Income

+ Pensions

Disposable

Income

Consumable

Income

Final Income

Gini Coefficient

Baseline

Simulation PIT rate=10% & VAT 18%

Simulation: Social benefits increase by 1/2 of cost of PIT reduction

13.9

12.1

15.4

11.8

14.8

10.8

14.0

0

2

4

6

8

10

12

14

16

18

Market income +

pensions

Disposable income Consumable income

Poverty Headcount Rate

(US$5.50 PPP)

2016 Baseline

Decline in both PIT and VAT

Social benefits increase by 1/2 of cost of PIT reduction

Summary (1/3)

• The combined effect of taxes and social spending helps to substantially reduce

poverty and inequality, with most of the reduction in inequality largely being

achieved by pensions.

• Households beginning in the second decile were net payers to the treasury in

2016, as the share of taxes paid exceeded the cash benefits received for all but

the poorest 10 percent of the population.

• Direct taxes and transfers are progressive and redistributive, more so than other

developing countries, but less than other European countries such as Poland and

Croatia.

• In contrast, indirect taxes are regressive and unequalizing.

Summary (2/3)• Health and education spending is progressive and equalizing,

particularly spending on primary and lower secondary education, and

spending on the minimum health benefit.

• However, spending on primary education is much less equalizing than in

other developing countries, while health spending is not necessarily pro-

poor.

Summary (3/3)Simulations

• Recent reduction in the PIT rate likely led to an increase in inequality,

• Reduction in the VAT rate is expected to have had no impact on inequality.

• This is because most of the tax relief accrued to the top of the income

distribution.

• The adopted policies were a very expensive way to achieve what is actually a

very small decline in poverty.

• A larger and more targeted social assistance system could have achieved better

distributional results at a much lower fiscal cost.

The results call for the use of simulation tools that could better inform the fiscal

and redistributive impacts of proposed reforms.

Simulation tool

• The team is developing a tool that would allow the government to play with

alternative scenarios.

• The tool is meant to be used by anyone, including people who do not have

programming skills.

• The objective is to make the tool as intuitive as possible for anyone to be

able to run alternative reform scenarios

• The tool includes a set of predefined variables that can be changed

• The team can train counterparts to use, update and improve the model

Thank you.

References

Bucheli, Marisa, Nora Lustig, Máximo Rossi, and Florencia Amábile. 2014. “Social Spending, Taxes and Income Redistribution in

Uruguay.” In Lustig, Nora, Carola Pessino and John Scott. 2014. Editors. The Redistributive Impact of Taxes and Social

Spending in Latin America. Special Issue. Public Finance Review, May, Volume 42, Issue 3.

Cok, Mitja, Ivica Urban, and Miroslav Verbic, 2012. “Income redistribution through taxes and social benefits: the case of Slovenia

and Croatia” MPRA Paper No. 38918, posted 21. May 2012. Available at: https://ideas.repec.org/p/pra/mprapa/38918.html

Duclos, Jean-Yves and Abdelkrim Araar. 2006. Poverty and Equity: Measurement, Policy, and Estimation with DAD. New York:

Springer and International Development Research Centre.

_______ and Martin Tabi. 1996. The measurement of progressivity, with an application to Canada. The Canadian Journal of

Economics. Volume 1, Special Issue (Part 1), April, pp. S165-S170.

Foster, J., J. Greer, and E. Thorbecke. 1984. A class of decomposable poverty measures. Econometrica 52: 761-766.

Higgins, Sean and Nora Lustig. 2015. Can a Poverty-Reducing and Progressive Tax and

Transfer System Hurt the Poor? CEQ Working Paper No. 33, Center for Inter-American Policy and Research and Department of

Economics, Tulane University and Inter-American Dialogue, April.

https://ideas.repec.org/p/pra/mprapa/38918.html

http://www.commitmentoequity.org/publications_files/Methodology/CEQWPNo33 FiscalImpoverishment April 2015.pdf

http://www.commitmentoequity.org/publications_files/Methodology/CEQWPNo33 FiscalImpoverishment April 2015.pdf

References

Higgins, Sean and Claudiney Pereira. 2014. “The Effects of Brazil’s Taxation and Social Spending on the Distribution of Household

Income.” In Lustig, Nora, Carola Pessino and John Scott. 2014. Editors. The Redistributive Impact of Taxes and Social Spending

in Latin America. Special Issue. Public Finance Review, May, Volume 42, Issue 3.

Inchauste, Gabriela; Lustig, Nora; Maboshe, Mashekwa; Purfield, Catriona; Woolard, Ingrid. (2015). The distributional impact of fiscal

policy in South Africa. Policy Research working paper; no. WPS 7194. Washington, DC: World Bank Group. Available at:

https://hubs.worldbank.org/docs/imagebank/pages/docprofile.aspx?nodeid=23984236

Jaramillo, Miguel. 2014. “The Incidence of Social Spending and Taxes in Peru.” In Lustig, Nora, Carola Pessino and John Scott. 2014.

Editors. The Redistributive Impact of Taxes and Social Spending in Latin America. Special Issue. Public Finance Review, May,

Volume 42, Issue 3.

Kakwani, N. 1993. Statistical inference in the measurement of poverty. Review of Economics and Statistics 75 (4): 632-639.

Lambert, Peter. 2002. The Distribution and Redistribution of Income. Third Edition. Manchester United Kingdom: Manchester

University Press.

Lustig, Nora, editor. 2017. Commitment to Equity Handbook: Estimating the Impact of Fiscal Policy on Inequality and Poverty.

Washington, DC: Brookings Institution Press and CEQ Institute, Tulane University. Advance online version available at

http://www.commitmentoequity.org/publications/handbook.php.

https://hubs.worldbank.org/docs/imagebank/pages/docprofile.aspx?nodeid=23984236

http://www.commitmentoequity.org/publications/handbook.php

ReferencesLustig, Nora, Carola Pessino, and John Scott. 2014. “The Impact of Taxes and Social Spending on Inequality and Poverty in Latin

America: Argentina, Bolivia, Brazil, Mexico, Peru and Uruguay. Introduction to Special Issue,” in Public Finance Review

42 (, Issue 3, published online November 20, 2013

Martinez-Aguilar, Sandra; Fuchs, Alan; Ortiz-Juarez, Eduardo; Del Carmen, Giselle. 2017. “The Impact of Fiscal Policy on

Inequality and Poverty in Chile.” Policy Research Working Paper, No. 7939. World Bank, Washington, DC. © World Bank.

Scott, John. 2014. “Redistributive Impact and Efficiency of Mexico’s Fiscal System.” In Lustig, Nora, Carola Pessino and John

Scott. 2014. Editors. The Redistributive Impact of Taxes and Social Spending in Latin America. Special Issue. Public

Finance Review, May, Volume 42, Issue 3.

Urban, Ivica. 2014.” Contributions of Taxes and Benefits to Vertical and Horizontal Effects,” Social Choice and Welfare, 42:

619–45.

Urban, Ivica. 2016. “Impact of Taxes and Benefits on Inequality among Groups of Income Units” Review of Income and Wealth

62(1): 120-44.

World Bank, 2008. “Croatia. Restructuring Public Finance to Sustain Growth and Improve Public Services” A Public Finance

Review. Report No. 37321 – HR.

World Bank. 2014. “Croatia. Public Finance Review. Restructuring Spending for Stability and Growth” Report No. 78320-HR

Methodology

• Standard incidence analysis without behavioral, lifecycle or

general equilibrium effects.

• The focus is on average incidence rather than incidence at the

margin.

• Does not take into account the quality of services delivered

by the government.

• Does not include some important taxes and spending.

• Corporate profit taxes, property taxes, VAT paid by institutions

• Spending on infrastructure investments, …

What is new?

• Comprehensiveness: assess both tax and expenditure policies

• Including indirect taxes and subsidies and in-kind benefits in

the form of free education and health care;

• Comparability: standard methodology across countries & over

time.

• Harmonization of concepts and methods

• Analytics of fiscal redistribution

Comparison: EUROMOD vs CEQ

EUROMOD CEQ

Direct taxes and

transfersIncluded and modeled in detail.

Included. Modeling benefits from

EUROMOD experience.

Indirect TaxationNot included

(some preliminary examples developed)Included

Consumption

subsidiesNot included

Included

(direct and indirect effects)

Transfers in kind:

Health

Education

Not included Included

Simulation of

reforms?

Tax-benefit micro-simulation model

programmed by EUROMOD team in

C++ . Users interact with Excel

interface.

Framework defines income aggregates,

for incidence. Can be used with any

data set/software. Ado files available in

STATA. User programs/customizes

simulations.

MacrovalidationEach team decides strategy to validate

the results with National Accounts.

Teams "scale down" National Accounts

figures to size found in the microdata

Market income

Disposable income

Plus direct transfers minus direct taxes

Minus net indirect taxes

Consumable income

Plus monetized value of public services: education & health

Final income

Construction of Income Concepts

Source: Lustig, 2018.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cu

mu

lati

ve

pro

po

rtio

n o

f

mar

ket

in

com

e/ t

ax

Cumulative proportion of the population

Pre-tax

Lorenz curve

Concentration curve

of a progressive tax

The Kakwani index of progressivity of a tax t is defined as:

Kt = CCt- Gx

where:

Gx is the Gini coefficient of pre-tax income

CCt is the concentration coefficient of the tax t

➢ Progressive Tax: Kt = CCt- Gx > 0

➢ Proportional Tax: Kt = CCt- Gx = 0

➢ Regressive Tax: Kt = CCt- Gx < 0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cum

ula

tive

pro

po

rtio

n o

f m

arke

t in

com

e/ t

ran

sfer

Cumulative proportion of the population

Progressive transfer

in relative terms

(NOT pro-poor)

Pre-transfer

Lorenz curve

Absolutely progressive

transfer (pro-poor)

The Kakwani index of progressivity of a transfer B is defined

as:

KB = Gx – CCB

Where:

Gx is the Gini coefficient of pre-transfer income

CCB is the concentration coefficient of the transfer B

➢ Note that the Gini coefficient and the concentration

coefficient are in reversed order from the Kakwani index for

a tax

• The Kakwani Index measures progressivity of taxes/spending.

• If positive progressive

• If negative regressive

• If there is a single intervention in the system, the Kakwani index will give an

unambiguous answer as to whether an intervention is equalizing

• However, if there is a tax and a transfer, then this is no longer the case

• Lambert (2001)

• A regressive tax can be equalizing (if the resources are used for progressive

transfers). In fact, the reduction in inequality can be larger with the tax than

without it.

importance of comprehensive analysis.

Is a particular tax or transfer progressive and

equalizing?

What is the contribution of a particular tax or

transfer to the change in inequality?

The marginal contribution of a tax is

𝑀𝐶𝑡 = 𝐺𝑥+𝐵 − 𝐺𝑥+𝐵−𝑡

Where 𝐺𝑥+𝐵−𝑡 and 𝐺𝑥+𝐵 are the Gini coefficient of

incomes after the tax and transfers and after transfer only,

respectively.

If 𝑀𝐶𝑡>0, the tax is equalizing.

50

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