**The reduction in inequality is comparable to that of other countries** . The 0.052 Gini points reduction is in line with results from other countries in the region such as the Russian Federation (0.063), but lower than countries like Croatia (0.092) and Poland (0.13) (Figure 4).<sup>35</sup> The impact is broadly in line with the size of the government in Albania from a cross-country perspective (Figure A2.3), although with similarsized governments, countries like Chile, Uruguay and Mexico achieve a larger redistributive effect.

**On the poverty side, however, the fiscal system was moderately poverty increasing in 2015** . Focusing on households’ absolute level of income, and using international poverty lines employed across countries in the CEQ sample of $2.5/day and $4/day (2005 PPP), our findings show a different picture from what is found on the inequality side. Starting from 7.5 percent of households in poverty at $2.5/day with pre-fiscal income, poverty increases slightly to 8.1 percent after the combined effects of direct and indirect taxes, contributions and direct transfers (Figure 5 and 6). This increase is higher with the $4/day poverty line, going from 22.6 percent to 29.1 percent. Taxes and contributions, and particularly indirect taxes, play an important role in this poverty-increasing effect. In fact, the reduction achieved with direct transfers, which contribute to reducing poverty (as reflected by the change from net market income to disposable income) is more than offset by indirect taxes that households face. In a similar way, those already poor are made poorer (fiscal impoverishment) as a result of indirect taxes. The poverty gap is reduced when direct transfers are incorporated, but the effect is reversed when incorporating indirect taxes. Poverty severity also rises once indirect taxes are taken into account (See Figures 22-25 in Annex 5). Following the literature and examples from other countries, the poverty effect of in-kind transfers is not computed, given that households do not observe the monetary value of health and education spending.

**Figure 5. Albania: Poverty Headcount at $2.5/day Figure 6. Albania: Poverty headcount at $4/day from from Market to Consumable Income Market to Consumable Income**

<!-- Start of picture text --> 0.09 8.1% 0.35<br>7.8%<br>0.08 7.5% 29.2%<br>0.30<br>0.07 24.1%<br>0.06 0.25 22.6% 21.3%<br>4.9%<br>0.05 0.20<br>0.04<br>0.15<br>0.03<br>0.10<br>0.02<br>0.01 0.05<br>0.00<br>0.00<br>Market Net Market Disposable Consumable<br>Income plus Income Income Income Market Net Market Disposable Consumable<br>Income plus Income Income Income<br>pensions<br>pensions<br><!-- End of picture text --> Source: Own estimates using the Albania HBS 2015.

Source: Own estimates using the Albania HBS 2015.

GHANA (Younger et al., 2017); GUATEMALA (Icefi, 2017a); HONDURAS (Icefi, 2017b); INDONESIA (Jellema, Wai-Poi, and Afkar, 2017); ISLAMIC REPUBLIC OF IRAN (Enami, Lustig, and Taqdiri, 2017); JORDAN (Alam, Inchauste, and Serajuddin, 2017); MEXICO (Scott, 2014); NICARAGUA (Icefi, 2017c); PARAGUAY (Galeano et al., 2017); PERU (Jaramillo, 2014); RUSSIAN FEDERATION (Lopez-Calva et al., 2017); SOUTH AFRICA (Inchauste et al., 2017); SRI LANKA (Arunatilake, Inchauste, and Lustig, 2017); TANZANIA (Younger, Myamba, and Mdadila, 2016); TUNISIA (Jouini et al., 2018); UGANDA (Jellema et al., 2018); UNITED STATES (Higgins et al., 2016); URUGUAY (Bucheli et al., 2014) and REPÚBLICA BOLIVARIANA DE VENEZUELA (Molina, 2016).

35 For Poland, see Goraus and Inchauste (2016). For Croatia, see Inchauste and Rubil (2017). For Montenegro, see Younger and Draganic (2017).

19