# **10 Conclusion and next steps**

## **10.1 Conclusion**

**The fiscal incidence analysis for the West Bank and Gaza in 2017 shows that the combination of taxes and transfers modeled reduced inequality but increased poverty.** Inequality decreased by 6.5 Gini points, from 35.0 at Market Income to 28.5 at Final Income), while the national poverty headcount increased by 8.4 percentage points, from 30.6 percent at Market Income to 39.0 percent at Consumable Income. This pattern is common in developing countries where the tax collection is mostly comprised of indirect taxes and social protection coverage is limited.

**The large increase in poverty due to combined taxes and transfers suggests that fiscal redistribution in the West Bank and Gaza could be improved.** Only the poorest decile is a net-receiver of the combination of taxes and transfers modeled in this study, all other deciles were net payers. Almost 50 percent of the poor population at Consumable Income (roughly 19 percent of the total population) experienced some degree of fiscal impoverishment—that is, a reduction of their Market Income after they paid taxes and received transfers.

**Most fiscal interventions were progressive relative to Market Income.** We measured this using the Kakwani Index. The regressive interventions, looking at Market Income, were fuel subsidies, pension income, and property tax.

**The marginal benefit of including in-kind benefits from health and education into the system accounts for 40 percent of the reduction in inequality, while the marginal benefit of including the CTP into the system accounts for 18 percent of the inequality reduction.**<sup>80</sup> We measured the marginal contributions of each instrument to either reducing inequality or reducing poverty **.** The large marginal contributions to inequality reduction stemming from public basic education is expected since poor households have more children that access basic public schools. The model could, however, overestimate the inequality reduction stemming from in-kind public health benefits considering that benefits were imputed based on access to public-health insurance rather than actual usage of public health services (not available in the PECS 2016/17). Yet human capital outcomes as measured by the SES-Disaggregated Human Capital Index are relatively even across socioeconomic quintiles compared to data for other countries,<sup>81</sup> suggesting that public spending on education and healthcare has been effective at reducing gaps in quality.

**The VAT and customs duties are important tools for domestic revenue mobilization, but they represent the main drivers of poverty increase in the West Bank and Gaza.** While VAT and customs duties were progressive overall, the large burden they cause explains why they represent the largest marginal contributions to the national increase in poverty. Pension contributions and the PIT also increase poverty, although to a lesser extent due to their smaller size.

**Strengthening the social protection transfer system could improve poverty and inequality reduction.** Cash transfers from social protection (CTP) and pension income contribute most to poverty reduction in

> 80 The marginal contribution of the in-kind benefits at Consumable income is 2.9 Gini points, while the CTP has a marginal contribution at Consumable income of 1.2 Gini points. 81 Avitabile et al (2020).

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