**Figure 9. Incidence of main components of tax benefit system by types of location, share of final income, percent.**

<!-- Start of picture text --> 50<br>40<br>30<br>20<br>10<br>0<br>-10<br>-20<br>-30<br>-40<br>-50<br>big cities small towns rural north center south Chisinau<br>SSC Direct Taxes Pensions Direct Transfers<br>Indirect Taxes In-kind Health In-kind Education Total<br><!-- End of picture text --> Source: authors’ calculations using HBS-2017 data.

# **4.2. Distributional impact and marginal contributions of fiscal interventions**

The tax benefit system in Moldova significantly reduces income inequality. The Gini index falls from 48 percent for market income to 30 percent for final income (Table 12) or by 18 percentage points, equivalent to a 38 percent reduction. The biggest decline of inequality comes on account of pensions – the Gini at the level of market income plus pensions is 14 percentage points or 29 percent lower than at the original level. After direct taxes and transfers the Gini index falls further by 4 percentage points or another 10 percent. However, the next layer – indirect taxes is dis-equalizing in the sense that these components increase the Gini index marginally by 2 percentage points. After in-kind transfers, the Gini index falls further by another 2 percentage points.

Poverty declines rapidly after tax-benefit interventions in Moldova. Depending on the poverty line, the poverty headcount falls by 20-60 percent from market income to consumable income<sup>9</sup> (Table 12). The effect is stronger for the lower poverty lines – for the international line of 3.2 USD/day in 2011 PPP the poverty rate goes down by 64 percent. For the international line of 5.5 USD/day in 2011 PPP and national lines the effect is less pronounced, but still high and reaches 20 percent. Like in the case of inequality, the biggest relative reduction of poverty happens through pensions. Direct transfers minus direct taxes still contribute to a notable absolute reduction in poverty incidence (Table 12).

The results for the alternative scenario, when pensions are treated as deferred income, are much more moderate. The Gini index falls from market income plus pensions to final by 2 percentage points or 3.4 percent. The poverty headcount under national and international lines actually increases by 16 percentage points due to the strong effect of indirect taxes, which overcompensates the positive contribution from direct transfers minus direct taxes.

**<u>Table 12. Poverty and inequality at various levels of income in Moldova.</u>**

||||market ma|rket +pensio<br>Inco|ns disposable c<br>me concept|onsumabl|e final|
|---|---|---|---|---|---|---|---|
|Inequality|Gini index||48.0|34.1|30.5|32.0|29.6|
||National||39.4|25.2|18.6|30.5||
|Poverty|International|(3.2 USD/day)|28.0|9.1|6.0|9.9||
||International|(5.5 USD/day)|43.2|27.9|22.2|33.3||

Notes: National - below the national poverty line (1562.8 MDL per month per adult equivalent) International - below the international line (3.2 USD/day in 2011 PPP or 759.4 MDL per month per capita) International - below the international line (5.5 USD/day in 2011 PPP or 1305.2 MDL per month per capita) Source: authors’ calculations using HBS-2017 data.

> 9 The poverty is usually not reported at the level of final income in the CEQ studies.

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