# **METHODOLOGY, DATA, AND ASSUMPTIONS**

Taxes, transfers, and fiscal policy more generally are powerful corrective instruments the state has at its disposal for reducing extreme forms of material deprivation and narrowing the gap between economic elites and the rest of the populace. These policies can also help equalize opportunities, through public education for example, and thus increase social mobility and the productive potential of the underprivileged. To assess whether governments are using these tools effectively, it is important to be able to quantify how inequality and poverty change from before to after the application of these fiscal instruments. In this study, the impact of fiscal policy on microlevel welfare indicators is estimated by allocating fiscal policy elements, programs, expenditures, or revenue collections to individuals and households appearing in the HIECS 2015. The framework for allocations and postallocation analysis follows the methodology developed by the CEQ Institute to assess fiscal policy (Lustig 2018).

# **Methodology**

To quantify the impact that fiscal policies have on income (or purchasing power or welfare), the first step is to estimate a (counterfactual) income state that would be experienced _before_ the transfers, benefits, and burdens generated by the fiscal system are received or imposed. As a proxy for this state, the concept of _prefiscal income_ (I�) is applied as the cumulative income received from wages and salaries (that is, from labor market transactions) plus the market value of consumption of own production; from capital (including real estate); and from private transfers (such as remittances from family members working abroad);<sup>20</sup> and finally from pensions (whether private or public). The _h_ subscript indexes a set of households (but equally could index individuals).

To note is that government policies may appear to have greater or lesser impacts depending on what is included in the variable describing the prefiscal income state. Egypt provides a good test case as rental market regulations create two different—and plausible—valuations of the value of housing services consumed; therefore two different distributions of prefiscal income over which fiscal policy can then be allocated; and finally two different distributions of postfiscal income (at each postfiscal income concept).

Next, the set of taxes and transfers _Ti_ to be examined is defined: for example, _Ti_ in Egypt might include the sales tax and the Takaful and Karama social assistance programs. For each household _h_ found in the microdata _shares_ ( _Sih_ ) of each program, _i_ = 1,.... _I_ in _Ti_ are allocated.

With the estimated shares, an estimate of _postfiscal income_ is created at the household level _Yh_ such that

> 20 A CEQ assessment typically includes two scenarios for contributions to, and income received from, the public contributory pension system. The first, which we call the Pensions as Deferred Income (PDI) scenario, treats contributions to and income from the public contributory pension system as compulsory savings and deferred income (respectively). The alternative, which we call the Pensions as Government Transfer (PGT) scenario, treats contributions and income as a tax and a transfer (from the fisc) respectively. We could not identify public contributory pension income received in  the HIECS 2015 nor did we have access to budget or administrative reporting that summarized total public contributory pension income distributed, so we did not estimate the PGT scenario.

17