<mark>Direct taxes and social benefits in Serbia are less equalizing than in a few Central and Eastern Europe (CEE) countries where similar analysis has been conducted. Based on the CEQ analysis for other countries</mark><sup>12</sup> <mark>, and disaggregating effects by policy instruments, the equalizing effects of direct taxes and social benefits in Serbia are somewhat stronger than in non-European developing countries, but still considerably smaller than in those CEE economies.</mark> The marginal contribution of all direct transfers in Serbia is to reduce the Gini (when pensions are treated as deferred income) by 0.0139. In Russia, Romania, and Croatia, they reduce inequality by 0.0220.024 points. Direct transfers in Armenia and Albania also have a higher capacity to reduce inequality, with the marginal contribution of 0.019 and 0.17, respectively. <mark>At the same time, the impact of indirect taxes in Serbia on inequality is close to the average of the CEE countries and non-EU developing countries with available CEQ results.</mark> <mark>The equalizing effects of in-kind transfers in Serbia is comparable with the effects in those CEE countries. The effects of health and education spending in Serbia are considerably stronger than in non-European developing countries which may be the result of its free and universal primary and secondary schooling and almost universal healthcare scheme.</mark>

# **Impacts on poverty**

Government intervention through taxes and benefits is associated with an increase in poverty in Serbia, mostly due to indirect taxes. Using household income and standardized international poverty lines of $1.9, $3.2, and $5.5/day (2011 PPP), the results suggest that the poverty rate decreases after direct taxes and social benefits are taken into account but increases upon the imposition of indirect taxes. In other words, social transfers cannot fully offset the burden of taxes on poverty. Table 3 shows that the share of the population whose consumable income is below a poverty line is higher than that for market income, except for the extreme poverty line of $1.9/day. The same trend applies if poverty is anchored on the national relative poverty line at 60 percent of median equivalized income.

Similarly, poverty gap and poverty severity are reduced when direct taxes and social benefits are introduced, but the effects are reversed after considering indirect taxes. This finding is robust across different absolute poverty lines and the relative poverty line. Since households do not observe the monetary value of health and education transfers, these items are not included in the computation of the poverty headcount, following standard practice.

> 2018); MALI (Hounsa, Coulibaly and Sanoh, 2019); MEXICO (Scott, 2014); MEXICO (Scott et al., 2018); MEXICO (Scott et al., 2018); MONGOLIA (Freije and Yang, 2018); NAMIBIA (World Bank, 2017); NICARAGUA (Icefi, 2017c); NIGER (Hounsa, Coulibaly and Sanoh, 2019);  PANAMA (Martinez-Aguilar, 2018); PARAGUAY (Gimenez et al., 2017); PERU (Jaramillo, 2014); PERU (Jaramillo, 2019); POLAND (Goraus and Inchauste, 2016); ROMANIA (Inchauste, et al, 2016); RUSSIA (Popova, 2019); SOUTH AFRICA (Inchauste et al., 2017); SRI LANKA (Arunatilake, 2019); TANZANIA (Younger, Myamba, and Mdadila, 2019); TUNISIA (Jouini et al., 2018); UGANDA (Jellema et al., 2018); UKRAINE (Bornukova et al., 2019); URUGUAY (Bucheli, 2019) and VENEZUELA (Molina, 2016).

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