The Incidence of Fiscal Policy in Armenia

presentation atAmerican 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 <much> 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• 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

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

Included in analysis?

share of revenue share of GDP

Total Revenues and Grants 880,851 100% 23% Tax revenues 631,593 72% 17%

Value added tax 328,481 yes 37% 9% Enterprise profit tax 97,842 no 11% 3% Personal Income tax 81,211 yes 9% 2%

Excise tax /1 39,405 yes 4% 1% Customs duty 36,289 yes 4% 1%

Presumptive tax 20,742 no 2% 1% Environmental tax 12,200 no 1% 0%

Simplified tax (50) no 0% 0% Other taxes 15,474 no 2% 0%

State duties 22,367 no 3% 1% Social insurance payments 123,450 yes 14% 3% Non-tax revenues 44,025 no 5% 1% Grants 59,416 no 7% 2%

Expenditures in Armenia

included in analysis?

share of expenditures share of GDP

Total Expenditures 1,075,622 28.5% Health 63,491 5.9% 1.7%

Outpatient Services 22,551 yes 2.1% 0.6% Inpatient Services 26,891 yes 2.5% 0.7%

Other Health 14,050 no 1.3% 0.4% Education 135,071 12.6% 3.6%

Pre-School Education 10,694 yes 1.0% 0.3% Elementary Education 30,357 yes 2.8% 0.8%

General Basic Education 36,022 yes 3.3% 1.0% Complete Secondary Education 15,724 yes 1.5% 0.4% Initial Professional (Vocational)

Education 2,180 yes 0.2% 0.1% Secondary Professional Education 3,177 yes 0.3% 0.1%

Higher Education 7,885 yes 0.7% 0.2% Other Education 29,032 no 2.7% 0.8%

Social Protection 258,336 24.0% 6.8% Ailment and Disability 1,251 yes 0.1% 0.0%

Old Age 188,396 yes 17.5% 5.0% Relative Lost Persons 190 yes 0.0% 0.0%

Family Members and Children 43,596 yes 4.1% 1.2% Unemployment 4,115 yes 0.4% 0.1%

Dwelling Provision 815 yes 0.1% 0.0% Special Social Privileges 10,934 no 1.0% 0.3%

Special Protection 9,039 no 0.8% 0.2%

Methods – Understanding Concentration Coefficient

• Concentration coefficient is 0.5*area between curve and 45-degrees

person incomeFamily benefit

income share FB share population income FB

0.00 0.00 0.001 5 3 0.02 0.6 0.20 0.02 0.602 10 2 0.03 0.4 0.40 0.05 1.003 25 0 0.08 0 0.60 0.13 1.004 75 0 0.24 0 0.80 0.37 1.005 200 0 0.63 0 1.00 1.00 1.00

cumulative shares

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

Poverty Line

Market Income

Net Market Income

Disposable Income

Post-Fiscal Income

Final Income

Gini 0.473 0.456 0.373 0.374 0.356z=$1.25 FGT(0) 0.211 0.224 0.096 0.119 0.090z=$2.50 FGT(0) 0.382 0.442 0.289 0.349 0.308z=$4.00 FGT(0) 0.560 0.659 0.555 0.627 0.600

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, 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

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

Poverty group:x <

$1.25

$1.25 < x <

$2.50

$2.50 < x <

$4.00

$4.00 < x <

$10.00$10.00 <

x totalEducation

pre-primary 1.2% 3.8% 11.0% 10.6% 25.3% 8.0%primary (I-IV) 89.3% 86.6% 91.8% 88.1% 100.0% 89.3%

general secondary (V-IX) 87.3% 86.0% 84.2% 82.2% 68.3% 84.0% secondary (X-XII) 60.4% 57.1% 60.5% 68.8% 62.9% 63.0%

secondary vocational 0.8% 1.7% 2.4% 0.4% 0.0% 1.2%secondary professional (college) 2.5% 5.0% 3.6% 3.3% 0.6% 3.4%

higher ed/post-grad 4.2% 3.7% 8.1% 9.2% 15.6% 7.7%Health care

Out-patient care 5.1% 5.9% 6.3% 7.7% 6.7% 6.6%In-patient care 0.41% 0.53% 0.40% 0.42% 0.35% 0.43%

Old-age pensionsNon-contributory 45% 22% 9% 7% 6% 12%

Contributory 54% 78% 91% 93% 93% 87%Other transfers

Family Benefit 32.2% 15.3% n.a. n.a. n.a. 22.3%Unemployment 4.9% 4.3% 3.3% 2.7% 2.9% 3.6%

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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