Credit Where Credit is Due

1. The Incidence of Fiscal Policy in Armeniapresentation atAmerican University of ArmeniaJan. 20, 2014Stephen D. Younger

2. Credit Where Credit is Due • huge amount of help, advice, criticism, and error checking from colleagues in Armenia and the CEQ project • In Armenia, especially Artsvi Khachatryan and Nistha Sinha • At CEQ, Nora Lustig, Sean Higgins, Gabriela Inchauste, and Catherine Lee

3. Introduction • What is an incidence analysis? • Who pays taxes, and who benefits from government spending? • Defined by population sub-groups, usually income-based • Can do this for very specific budget items, • e.g. the family benefit, or tobacco excises • Or the entire budget (more or <much> less) • Problem of public goods • Problem of survey information • CEQ tries to do the latter

4. Context of the Study • Commitment to Equity Project, Tulane Univ • http://www.commitmentoequity.org/ • Similar studies already completed in many Latin American countries • Now expanding to other areas • Armenia is the first country in Europe and Central Asia to participate

5. Introduction • A caution on equity and efficiency • These results are **very** preliminary • My goals for today • Let you see what is possible • Ask you to pay attention to the details of what we have done, and correct errors • Not so much to present final results

6. Methods • Data to describe the distribution of income come from ILCS 2011 • The CEQ income concepts (figure next slide) • Note: we are not using the welfare variable that NSS uses in poverty analysis • For each income concept, we calculate Gini coefficients and FGT poverty measures

8. Methods • There are two ways a tax or expenditure can have a larger effect on the distribution of income • It can be well-targeted • It can be large compared to incomes • It is easy to understand the second characteristic (see following slides)

9. Taxes in Armenia

10. Expenditures in Armenia

11. Methods – Understanding Concentration Coefficient • Concentration coefficient is 0.5*area between curve and 45-degrees

12. Results • Look first at concentration coefficients over market income • Then effects on inequality (Gini) and poverty (headcount at $1.25, $2.50, and $4.00) • Once again, very preliminary • Best to see these on paper

13. Results – Concentration Coefficients • For Armenia, the most familiar analysis is “sensitivity 1” – pensions as transfer payments • Overall, pretty much what one would expect if things are working well • Targeted transfers are very progressive, at least compared to most developing countries • Services that should be universal are evenly spread across the population • Taxes fall more on the rich than expenditures • Direct taxes are more progressive than indirect • Out-patient health care may be a concern • Pre-school is not very progressive.

15. Results – Concentration Coefficients • The previous slide’s conclusions hold up pretty well under different sensitivity analyses • Obviously, if we treat contributory pensions as market income rather than a transfer (“benchmark” analysis), it becomes much less progressive

16. Summary Results, Contributory Pensions as Transfers

17. Results – Inequality and Poverty • Again, go to paper copies for this • Market to net market income: direct taxes redistribute relatively little • Remember that they have high c.c.’s • So this reflects low tax take for these taxes • Market to net market income: direct taxes have only minor poverty effects until we get to the higher poverty lines

18. Results – Inequality and Poverty • Net market to disposable income: direct transfers reduce Gini by ~0.12 … • … except when we include contributory pensions as market income (deferred compensation) rather than a transfer • this effect is greatly reduced if we scale these pensions down • At the highest poverty line, direct transfers are only just sufficient to bring poverty back below that for market income

19. Results – Inequality and Poverty • Disposable income to post-fiscal income: indirect taxes have almost no effect on inequality, but do affect poverty, especially at the higher poverty lines • This result might change if we disaggregated our estimates of effective tax rates • As it stands, the poor are buying goods that pay VAT, import duties, and excises • Direct taxation would be more equitable (though perhaps not more efficient) and less poverty-inducing

20. Results – Inequality and Poverty • Post-fiscal to final income: in-kind benefits (health and education here) reduce Ginis by about 0.02 • And they have a modest effect on poverty, larger at z=$2.50 than otherwise • Overall, the fisc reduces the Gini by 0.12, but much less, 0.03-0.05, if contributory pensions are treated as deferred compensation • Overall, the fisc reduces poverty only at the lower two poverty lines, and less still if contributory pensions are treated as deferred compensation

21. Results – Coverage • “Coverage” measures the share of the target population that a particular expenditure actually reaches or benefits • This is a way to measure targeting of an expenditure • Errors of exclusion • Errors of inclusion • Different for each expenditure • Not the same concept as “incidence”

22. Coverage of Social Spending

23. Results – Coverage • Education coverage • high, though it falls off at the secondary level • Spread evenly across the income distribution… • … except for pre-school and university • Health coverage • More difficult to judge, but seems good • Old-age pensions coverage • Perfect • Family benefit and unemployment • Extremely low • Remember that these are among the best-targeted transfer payments

24. Conclusions • The targeting results seem good • Armenia is targeting need-based transfers pretty well • What about the “other” transfers? • And getting “universal” services evenly across the population • What about out-patient health? • Direct taxes are quite progressive • Indirect less so, but not bad

25. Conclusions • This is encouraging, but also means there is no low hanging fruit in redistribution policy for Armenia • e.g. attempts to close VAT loopholes probably will fall on the poor (but: need to disaggregate effective tax rate calculation) • Cannot get better inequality and poverty results through better targeting (at least compared to other developing countries) • So greater redistribution would have to be through larger program sizes • Best candidates: expand Family Benefit and unemployment compensation

26. What is Next? • We will get many helpful comments and criticisms which we will incorporate in the report • Some plans • Sensitivity analysis using adult-equivalent scale • Apply industry-specific effective VAT rates • Include property taxes • Split in-patient care into childbirth and other • Better disaggregation of transfer payments • Review existing literature on fiscal incidence in Armenia • Account for non-response in ILCS

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