is isolated from the remainder of the West Bank by the separation barrier and expanding settlements.<sup>9</sup> The West Bank does not function as a single contiguous administrative system. The Oslo Accords designated discontinuous areas to be assigned to the civil and security (or joint security) jurisdiction of the PA—Areas A and B—and left the more than 60 percent of the territory remaining primarily under Israeli control as Area C.<sup>10</sup> The PA is responsible for service provision in Area C, but infrastructure development and taxation fall within Israeli authority.<sup>11</sup> Gaza meanwhile is under a sea and air blockade, and has been under the _de facto_ authority of Hamas since 2007. The PA and the _de facto_ authorities in Gaza do not coordinate administrative and fiscal systems.<sup>12</sup> Palestinians living in these distinct contexts experience very different fiscal and socioeconomic realities, and it is difficult to move between the physically separated territories.<sup>13</sup>

## **The PA operates within the policy constraints defined by this fragmentation and by the Paris Protocol.**

Intended as a temporary arrangement, over 25 years after its signing the Protocol remains the general framework governing, shaping, and constraining Palestinian trade relations, and trade, macroeconomic, and fiscal policies, including economic and fiscal relations between the PA and the Government of Israel (GOI).<sup>14</sup> Among other provisions, it ties Palestinian regulatory frameworks, indirect tax rates, and trade policy to those of Israel.<sup>15</sup> It also established the revenue clearance system by which the GoI is supposed to collect and transfer certain public revenues to the PA, including import taxes, taxes on Palestinian workers in Israeli-administered territories, and taxes on economic activity in Area C.<sup>16</sup> Some provisions of the Paris Protocol are outdated, and sometimes inconsistently implemented. In addition, under the current _de facto_ authority Gaza is not integrated into the Protocol. The fiscal difficulties this situation creates for the PA are substantial: the administration spent about one-third of its 2021 budget in East Jerusalem and Gaza but collects almost no revenue from these areas or from Area C.<sup>17</sup>

## **Acknowledging these constraints, this analysis aims to understand the distributional impacts of PA fiscal**

**policies.** We aim to analyze the overall household welfare effects of a complex fiscal environment and identify areas where policy change could reduce poverty and advance equity.

# **1.1 Six Key Findings**

**1. Fiscal policies reduce inequality but increase poverty.** The final model in the analysis finds that the combination of taxes and public transfers in the 2017 fiscal year reduces inequality by 6.5 Gini points and increases the national poverty headcount by 8.4 percentage points. Much of the reduction in inequality is driven by in-kind benefits (basic public education and public health), while the poverty increase stems from the fact that the social protection system in the West Bank and Gaza is too small to compensate for the impoverishing effects of indirect taxes such as customs duties and the Value-Added Tax (VAT). The

> 9 United Nations General Assembly (September 14, 2022).

> 10 United Nations General Assembly (September 14, 2022).

> 11 United Nations General Assembly (September 14, 2022); United Nations Conference on Trade and Development (2019).

> 12 Office of the United Nations Special Coordinator for the Middle East peace process (September 22, 2022).

> 13 See for example World Bank (September 2022); United Nations Office for the Coordination of Humanitarian Affairs (OCHA) (January 25, 2023), OCHA (January 23, 2023), OCHA: occupied Palestinian territory (OCHA oPt) (June 2020).

> 14 Office of the United Nations Special Coordinator for the Middle East peace process (September 22, 2022).

> 15 World Bank (September 2022), Office of the United Nations Special Coordinator for the Middle East peace process (September 22, 2022).

> 16 World Bank (September 2022), United Nations Conference on Trade and Development (2019).

> 17 International Monetary Fund (2022b).

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