Living Conditions (SILC), with 2016 income data, and 2016 budget and administrative data from the Statistical Office of Serbia, Ministry of Finance, Ministry of Education, Science and Technological Development, and Ministry of Health. It examines the following main questions: How much redistribution and poverty reduction are accomplished through social spending, subsidies, and taxation in Serbia? How progressive are revenue collection and government spending? Based on the data available, the analysis covers fiscal components that represent about 65 percent of direct taxes (83 percent of contributions), 50 percent of indirect taxes revenues, and 82 percent of spending. As with many other CEQ studies, certain categories such as corporate tax and spending on infrastructure are excluded due to the difficulty of assigning the benefit or burden to individual households based on the available information.

Our findings show that Serbia’s fiscal system reduces inequality, though it has a povertyincreasing effect. The system is redistributive, reducing the Gini coefficient of income from 0.38 at market income to 0.35 at final income, including the benefit of public expenditures on education and health. However, poverty, measured as per-capita income below $5.5/day in 2011 PPP, is estimated to increase by about 7 percentage points, from 15.3 percent in market income (including pensions as deferred income) to 22.4 percent in consumable income after reflecting direct and indirect taxes and transfers. Serbia’s social benefits are inequalityreducing. Direct taxes in Serbia are overall slightly progressive, and their impact on lowering inequality is smaller than that of direct transfers and the impact observed in other countries. The flat personal income tax gives little progressivity while regressivity of Value-Added Tax (VAT) with respect to current income increases inequality. With respect to consumption when looking at welfare over the life cycle, the incidence of VAT is much less regressive. Future analyses can assess the impacts of potential changes to a tax or a benefit, or a combination of several changes, in the system. Simulating such changes would demonstrate further use of this analysis for policy making.

The paper is organized as follows. The next section describes the system of taxes and social spending. Section III presents the data, assumptions, and methodology in estimating the impact, combining household survey, national accounts, and administrative data. Sections IV and V show the results regarding the impact of the net fiscal system and of each fiscal intervention, respectively. The following section concludes with direction for further use of the analysis.

# II. **The structure of taxes and social spending in Serbia**

## **Fiscal revenue**

The public finance system in Serbia consists of:

- _i)_ central government (Budget of the Republic of Serbia, Social security funds – Pension and Disability Insurance Fund, Health Insurance Fund and National Employment Service, and regulatory bodies);

- _ii)_ local self-governments;

- _iii)_ central-level state owned enterprises (e.g. Electric Power Company, Roads of Serbia, etc.) and local-level state owned enterprises (utility companies).

The structure of tax revenues in Serbia is presented in Table 1, and Appendix 3 includes detailed description of the taxes and spending system.

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