The Incidence of Fiscal Policy in Armenia presentation at American University of Armenia Jan. 20, 2014 Stephen D. Younger

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

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 less) Problem of public goods Problem of survey information CEQ tries to do the latter

Context of the Study Commitment to Equity Project, Tulane Univ 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

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

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

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)

Taxes in Armenia

Expenditures in Armenia

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

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

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.

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

Summary Results, Contributory Pensions as Transfers

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

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

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

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, , 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

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”

Coverage of Social Spending

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

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

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

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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