Although the poor consume taxed goods such as energy directly, the rich consume them indirectly by purchasing goods whose production requires energy and other taxed goods. Incidence studies of fiscal policy in developing countries typically examine either the distribution of tax burdens or the incidence of public expenditures. But the central issue for policymakers is the combined or net incidence of fiscal activities. Even if a tax is regressive, the impact of increasing it may not be, if the revenue raised is spent in a progressive manner. But even if the beneficiaries of public spending are the poor, the net effect may not be pro-poor, if the spending is financed by a highly regressive tax.
Most analysts consider themselves lucky if they have data on either.
For 20 years, the Philippine economy has experienced a series of balance of payments crises triggered by fiscal crises. It has had an unsatisfactory record of poverty alleviation. Devarajan and Hossain examine net fiscal incidence to find out. Contrary to expectations, indirect taxes are only slightly regressive. The poor consume taxed goods such as energy directly, but the rich consume them indirectly by purchasing goods the production of which requires energy and other taxed goods.