# I. Introduction

Over the 2000s, the Russian Federation has shown progress in reducing poverty, alongside fairly steady economic growth. The average economic growth rate between 2000 and 2010 was 5.4 percent. The share of the population living in poverty declined for more than a decade, from around 30 percent in 2000 to about 11 percent in 2014, based on the national poverty line. Notwithstanding this progress, poverty reduction has stagnated, and in recent years, poverty increased, from 10.8 percent in 2013 to 13.3 percent in 2015 and stayed broadly unchanged since then. Income inequality, on the other hand, rose significantly during the economic transition in the 1990s, and has since stabilized at a high level by international standards. The country’s Gini<sup>1</sup> index in 2017 at 41, is above the world average of 38 for 78 developed and developing countries circa 2010 (López-Calva, et al., 2017).

The fiscal system in the country is playing an increasingly important role in poverty reduction and inequality trends, particularly after the global financial crisis of 2008-09.<sup>2</sup> Fiscal incidence analyses indicate that, while the system of taxes and transfers in the country has a limited redistributive capacity across the income distribution, it does redistribute across socioeconomic groups. As shown in Lopez-Calva et al. (2017), households of individuals of working-age, both with and without children, are net payers, while pensioners’ households are the only group that benefits from fiscal redistribution, and that the majority of the distribution takes place through pensions. Some of the major constraints to redistribution capacity previously identified include the large share of tax revenues that originate from indirect (regressive) taxes, a low share of spending on social assistance towards low-income groups, and the neutral impact of the personal income tax (ibid). Furthermore, the recent recession and continued period of slow growth in the country and the international sanctions are putting pressure for fiscal consolidation, bringing additional challenges to avoid worsening income distribution.

The purpose of this paper is to introduce applications of RUSMOD—a microsimulation model for fiscal incidence analysis in Russia- to answer questions about the distributive impact of fiscal reforms. RUSMOD combines household survey micro-data and fiscal policy rules to simulate the Russian taxbenefit system: the size and distribution of taxes collected and benefits paid, and the impact of the system on different population groups. Microsimulation models, such as RUSMOD, are habitually used in developed countries, and can be versatile budgetary policy tools. Using this model, we examine the tax-benefit system in the country. The impact of the system is measured across the income distribution, age groups, family types, localities, as well as across time.

RUSMOD can be used to further inform fiscal and social protection policies in Russia. Challenges to make taxes more progressive while raising revenues, to realign spending without increasing poverty and to consolidate and better target benefits are likely to increase in importance. RUSMOD, as part of a larger toolbox, is well-suited to contribute to answer this type of questions. This paper includes three applications of the current version of RUSMOD. First a description of the impact of the Russian tax-benefit system upon poverty and inequality. Second, an assessment of the distributional changes brought about by changes in tax and fiscal policy over the period 2010-2017. Third, a simulation of the impact on poverty and inequality of a hypothetical tax reform scenario. In this case, we investigate whether the existing system creates disincentives for formalization in terms of reducing disposable incomes, increasing poverty and inequality; and whether a hypothetical tax reform may be able to reduce the opportunity costs of formalization for informal workers, improve distributional outcomes

> 1 Gini index equal to Gini coefficient multiplied by 100. 2 See Annex 1. Basic facts about the Russian tax-benefit system.

3