**Figure 14. Kakwani indices by types of interventions in Moldova and peers.**

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1.0<br>0.8<br>0.6<br>0.4<br>0.2<br>0.0<br>-0.2<br>-0.4<br>-0.6<br>SSC Direct Taxes Pensions Direct Transfers Indirect Taxes Indirect Subsidies In-kind Health In-kind<br>Education<br>Belarus Moldova Romania Russia Ukraine<br><!-- End of picture text -->

Note: Kakwani index is a measure of progressivity. The higher the value is the more progressive is the transfer. Source: authors’ calculations using HLCS-2016 data for Ukraine and respective CEQ analysis for other countries: Belarus – Bornukova et al., 2017; Poland - <mark>Goraus and Inchauste, 2016; Russia – Popova et al., 2018.</mark>

# **5. Conclusions**

This paper examined the fiscal incidence of the tax-benefit system in Moldova and its contribution to poverty and inequality reduction. The analysis reveals that the tax-benefit system in Moldova is quite pro-poor – 60 percent of the population are net recipients and only 40 percent are net payers into the system. Households at the bottom of the income distribution rely almost entirely on transfers – they receive as much as 96 percent of their final income as net benefits (including old age pensions); the top two deciles contribute 20 and 34 percent of their final income respectively into the redistributive system in Moldova. Across different household types, families with three or more children, as well as single-parent families and retirees-only households are among the key beneficiaries. The system also allows for some smoothing of spatial inequalities, as the main beneficiaries are concentrated in rural areas and small towns, while those living in big cities are net payers on average.

The overall redistributive effect of the tax-benefit system is significant. The Gini index falls from 0.48 for market income to 0.30 percent for final income, a 38 percent reduction. The main redistributive effect is on account of pensions – just comparing the level of inequality in the space of market incomes with that associated with market income plus pensions reveals a 14 percentage points reduction in the Gini index of inequality. Indirect taxes are dis-equalizing, but given the relatively more uniform distribution of indirect taxes across the population, the effect is only a 2 percentage points increase in the Gini index when going from disposable income to consumable income.

In addition to its equalizing effect, the fiscal system also contributes to a notable reduction in poverty. Depending on which poverty threshold is used, the poverty headcount falls by some 20-60 percent from the level associated with market income alone, before fiscal interventions, to consumable income, inclusive of direct and indirect taxes and transfers. Notably, the poverty reduction effect is stronger for lower poverty lines, suggesting that the protective effect of the safety net gets stronger as we move towards the lower end of the income distribution. Like in the case of inequality, pensions are the transfers that contribute to poverty reduction the most, but direct transfers also contribute a notable reduction in poverty incidence.

In terms of overall progressivity, pensions and direct transfers are the most progressive components of the taxbenefit system in Moldova, followed by in-kind health and education benefits. Direct taxes and pension contributions are also marginally progressive, while indirect taxes (primarily VAT) are the only regressive component of the tax-benefit system in Moldova.

What is of greatest interest to policy makers, however, is the efficiency of various programs, or the magnitude of their impact (on poverty and inequality, in our case), per unit of budget allocated to that program. The CEQ analysis reveals that the targeted social assistance benefits to the poor families are the most efficient. Of all the types of direct transfers, poverty benefits have the lowest cost of fighting poverty and inequality. This type of intervention has also the best targeting results – up to 40 percent of the program budget goes to bottom decile and almost 80 percent goes to the bottom 40 percent of the distribution, while only 1 percent goes to the top quintile. Social pensions and child and family benefits are also relatively well targeted, but mostly focused on the bottom 40 percent of the distribution, while the bottom decile receives a twice lower share of the budget than social 28