and excludes the respective pension contributions. Continuing from _market income plus pensions_ , if we subtract direct taxes and social insurance contributions other than pension ones and add direct cash transfers (and other social benefits except pensions) we arrive at _disposable income._ Disposable income is typically the key income concept in standard analyses of poverty and inequality, and as such, the fiscal analysis typically stops here. However, we compute two further income concepts. By subtracting indirect taxes (VAT and excises) and adding subsidies we arrive at _post-fiscal income_ , which reflects the actual amount of market goods and services consumed by households (sometimes this is also referred to as _consumable income_ ). Finally, we define _final income_ as one that includes the cash equivalent of the cost of public health and education services consumed by households.

**Figure 5. Construction of income concepts**

<!-- Start of picture text --> Final income<br>+ in kind transfers<br>(education and healthcare + indirect subsidies – direct transfers (cash and in kind benefits,<br>public expenditures) (utility subsidy and transport subsidy)<br>pensions* )<br>Disposable income<br>Consumable income (total cash expenditures + net in Market income<br>kind income + in kind benefits)<br>– indirect taxes + direct taxes (PIT and<br>(VAT, excises, and import duties) SPF contributions* )<br><!-- End of picture text --> Note. * Pensions and SPF contributions are included into direct transfers and taxes respectively only within PGT approach. Source: own elaboration.

Given the significant weight of the pension system, both as a source of revenue and as a component of social spending, it can have an important redistributive effect. The CEQ methodology allows us to consider two extreme assumptions with respect to how pensions are modeled: contributory pensions are treated as direct transfer, contributions to the pension system are subtracted from gross income - _pension as government transfers (PGT) scenario_ ; and contributory pensions are treated as a part of market income, contributions to the pension system are treated as lifetime earnings and not subtracted from gross income – _pension as deferred income (PDI) scenario_ . In reality, the distinction between contributory and non-contributory pensions can be arbitrary, given that pensions are funded, in part, through the state budget. The two scenarios can thus be considered as an upper and a lower bound of a true estimate of the distributional impact of the pension system. The analysis in this paper mostly relies on the PGT scenario (this is also the case in recently completed CEQ analyses for Belarus and Ukraine, for instance), however, the results for the alternative could be easily received if market income plus pensions is considered as initial level.

The CEQ methodology relies on a number of key assumptions that should be kept in mind when interpreting the results of the analysis. For instance, the analysis is based on economic rather than statutory tax incidence, hence, we assume that individual income taxes and contributions (both by employee and employer) are borne by labor in the formal sector and that consumption taxes (on both final goods and inputs, using input-output tables for the latter) are fully shifted forward to consumers. This is equivalent to assuming that the supply of labor and demand for goods and services are perfectly inelastic<sup>6</sup> (Lustig, 2018). In addition, the welfare indicator used is income per capita in accordance with the national statistical practice. Finally, it is worth noticing that CEQ framework is aimed at incidence analysis using amounts reported in the survey, therefore the annual amounts of tax revenues and social spending do not necessarily coincide with those found in other sources, in particular National Accounts.

One of the objectives of the CEQ is to provide insights into the progressivity / regressivity of taxes and transfers. We rely on common definitions of tax progressivity (see Box 1 for more details), consistent with high-income groups facing a higher average tax rate than low-income groups (relative progressivity). Similarly, cash transfers are considered to be progressive when they account for a larger share of the low income groups’ income (Joumard, 2012). In addition, we also compute Kakwani indices of progressivity (Kakwani, 1977; Lustig, 2018) – a positive

> 6 The economic incidence, strictly speaking, depends on the elasticity of demand and/or supply of a factor or a good, and the ensuing general equilibrium effects. In essence, the accounting approach implicitly assumes zero demand price and labor supply elasticities, and zero elasticities of substitution among inputs, which may not be far-fetched assumptions for analyzing effects in the short run, especially when changes are small (Lustig, 2018).

14