# **4.3. Efficiency of taxes and transfers**

While absolute effects of the programs matter, a policy maker would also be interested in their cost and cost efficiency. We calculate the cost of reducing poverty by 1 percent through each transfer program, and we also calculate tax collections per each percent of generated poverty for taxes. We also look at how well the programs are targeted by looking at the shares of the program going to (or taxing) the poor; to the bottom 40 percent; and to the top 10 percent in income. We focus only on direct transfers and pensions for the expenditure side, as their primary goal is to alleviate poverty and inequality. Health and education expenditure pursue other goals, and hence we cannot evaluate their efficiency based only on the effects on poverty and inequality.

# **<u>Table 15. Measures of efficiency of transfers in Moldova.</u>**

|||<br>Cost of 1p.|<br>p. reduction of G|<br>ini andpoverty (b|ylines)|<br>Targeting: shar|<br>e ofprogram bud|<br>get thatgoes to|
|---|---|---|---|---|---|---|---|---|
||Gini|national in|ternational(3.2)|international(5.5)|poverty gap|Bottom 10|Bottom 40|Top20|
|**Pensions**|**1,809**|**872**|**979**|**823**|**1,245**|**28**|**65**|**11**|
|Laborpensions|1,794|878|996|819|1,258|32|67|11|
|Otherpensions|2,091|750|1,217|722|1,566|30|65|13|
|**Direct Transfers**|**1,574**|**602**|**1,145**|**656**|**1,392**|**20**|**64**|**6**|
|Socialpensions|1,393|522|1,467|689|1,478|18|74|6|
|Social assistance topoor families|1,117|437|777|575|893|40|83|1|
|Child and familybenefits|1,562|1,222|816|787|1,899|20|70|1|
|Unemployment benefits|2,056|n/a|2,229|n/a|n/a|n/a|n/a|0|
|Scholarships|1,973|1,536|1,239|513|1,909|19|55|10|
|Other benefits|2,286|505|2,626|651|2,186|6|51|11|

Notes: costs are in mln. MDL National - below the national poverty line (1562.8 MDL per month per adult equivalent) International - below the international line (3.2 USD/day in 2011 PPP or 759.4 MDL per month per capita) International - below the international line (5.5 USD/day in 2011 PPP or 1305.2 MDL per month per capita) Income deciles were defined on the basis of disposable income without the transfer or pension Source: authors’ calculations using HBS-2017 data.

Labor pensions, while non-conditional on income by construction, are moderately efficient in reducing inequality and poverty at the lower lines but become very inefficient in reducing the poverty at the higher line. Since many of the retirees rely on pensions as the only or major source of income, labor pensions, despite high cost, generate large marginal effects. Hence, the cost of reducing the extreme poverty rate and the poverty gap at the national line as well as inequality through labor pensions is relatively low. Pensions are also quite well targeted despite the absence of the targeting mechanism in the design: 65 percent of labor pensions go to bottom 40 percent of the distribution (defined before pensions), and only 11 percent goes to the top income quintile (Table 15).

The targeted social assistance to poor families benefits are the most efficient. Of all the types of direct transfers, poverty benefits have the lowest cost of fighting poverty and inequality (Table 15). This type of intervention has also the best targeting results – up to 40 percent of the program budget goes to bottom decile and almost 80 percent goes to the bottom 40 percent of the distribution, while only one percent goes to the top quintile (Table 15). Social pensions and child and family benefits are also relatively well targeted, but mostly focused on the bottom 40 percent of the distribution, while bottom decile receives twice lower share of the budget than social assistance to poor families (Table 15).

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