service) as the measure of average benefits. This approach is also known as the “classic” or “nonbehavioral approach”, and it amounts to asking the following question: how much would the income of a household have to be increased if it had to pay for the free or subsidized public service at the full cost to the government? The IES provides information on educational enrolment by level and type: public versus private institutions. Data on the use of public health services come from the 2008 National Income Dynamics Study (SALDRU, 2014). Details on the assumptions used for the health incidence are included in Appendix 1.

There are some important caveats about what the fiscal incidence analysis applied here does not address:

- It does not take into account behavioral, lifecycle or general equilibrium effects and focuses on average incidence rather than incidence at the margin. Our tax shifting and labor supply response assumptions are strong because they imply that that consumers have perfectly inelastic demand and that labor supply is perfectly inelastic too. In practice, they provide a reasonable approximation, and they are commonly used.

- The analysis does not take into account intra-household distribution of consumption.

- The analysis cannot take into account the quality of services delivered by the government.

- We are unable to include some important taxes and spending that are included in the general government budget. Revenues such as corporate income, international trade or property taxes and spending categories such as infrastructure investments including urban services and rural roads for example are excluded even though they affect income distribution and poverty reflecting a combination of data as well as methodological constraints.<sup>32</sup> In addition, since the analysis focuses on tax and spending programs that are on-budget and are part of the general government, it excludes operations of state-owned enterprises.

- The analysis does not capture the growing debate on how asset accumulation and returns to capital impact income inequality.

Note that by considering the poverty and redistributive effects of the fiscal instruments that were examined in this paper, we do not offer a full analysis of whether specific taxes or expenditures are desirable. When one tax or expenditure is found to be more redistributive to the poor than another, the temptation is to conclude that the former is preferable. However, redistribution is only one of many criteria that matter when making public policy. Good tax policy will aim to be sufficient, efficient and simple in addition to equitable; and public spending will aim to (among other goals) provide the minimal functions of a state (such as security) and invest in necessary public goods (such as infrastructure) that are necessary to ensure prosperity in addition to improving equity. By assessing the equity of specific taxes and spending programs, the results presented in this paper are just one input to public policy making, one which should be weighed with other evidence before deciding that a tax or expenditure is desirable.

To try to control for these possible shortcomings and biases, we conduct various robustness tests. In addition to calculating the various measures of income in Figure 3 from the reported level of net income in the IES, we also cross checked our findings using the reported level of disposable income, which closely approximates consumption, to calculate the steps in Figure 3.

# **IV. The Level and Progressivity of Selected Taxes and Social Spending Programs in South Africa**

What is the incidence of taxes and spending? Who bears the burden of taxation and who benefits from the various forms of social spending? This section aims to assess whether government taxes and spending are progressive by first analyzing alone each tax and social spending component that was included in this study, and then assessing the progressiveness/regressiveness of these selected taxes and spending combined.

> 32 The incidence of international customs tariffs can be estimated the same way the incidence of other indirect taxes was estimated. However this paper did not do so given time constraints. For property taxes, the cadastral value of property would be required, and this was not available for this study. The empirical tools necessary to undertake incidence analysis of corporate taxes and investment spending are not well established in the literature and were beyond the scope of what could be done in this paper.

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