assumed to receive transfers. Per student expenditure data are taken from Annual Education Statistics 2018 (for boarding schools and day schools at the primary and secondary level) and State of Tertiary Education in Bhutan 2017 (for tertiary level).

### **_Health_**

Since Bhutan’s health sector is managed and financed by the government, all households are considered as beneficiaries. We allocate health transfers using an insurance-value approach in which the same per capita spending is assigned to those sharing the same characteristic. Since per capita health care expenditure was only available by age group, we apply the transfer amount to all individuals in the survey based on their age. Variation in the quality of services or different valuations of health services across the welfare distribution are not considered.<sup>24</sup>

# 4. The Distributional Impact of Taxes and Social Spending

This section starts by describing the overall distributive impacts of taxes and social spending on poverty and inequality; these are then benchmarked against other countries. The second half of the section focuses on the disaggregated impact of individual policies.

## 4.1. Impact on Poverty and Inequality

Taxes and social spending combined contribute to a decrease in inequality in Bhutan. Figure 2 presents the Gini index of inequality for each income concept described in Figure 1. The Gini index based on market income (or gross market income plus pension) is 38.7 prior to any fiscal intervention; this is assuming that contributory pensions, mainly an entitlement for civil servants, are treated as deferred income. The Gini index slightly declines to 37.8 once direct transfers, personal income taxes and social security contributions are taken into account, and further to 36.1 when indirect taxes and subsidies are considered. The largest equalizing effect is achieved through in-kind transfers, which in Bhutan are mainly the benefits stemming from education and health services—the Gini index based on final income is notably lower at 31.3. The overall reduction in inequality is equivalent to around 7.4 Gini points from market income to final income.

The magnitude of the overall reduction in inequality compares relatively favorably in international comparison. Bhutan’s tax-benefit system ranks above the middle when compared with other middle-income countries by the magnitude of its redistributive effect, measured using the decrease in the Gini index (figure 3). The reduction of 7.4 points in Bhutan’s Gini index is similar to the performance of the net fiscal systems of Ecuador and Turkey, and lower than that of Mexico and Brazil, though these countries have a significantly higher GDP per capita than Bhutan. In fact, the redistributive impact of fiscal policies is significantly larger in high-income countries compared with low- or middle-income countries. The initial

> 24 We do not use the actual consumption approach, which allocates the transfers based on actual health care usage. That approach has a few shortcomings: (i) the demand for health care services is irregular and we would only observe care utilization during a short reference period; (ii) individuals with worse health conditions are assigned a higher transfer, which would have a significant impact on the income distribution that may not reflect the purpose of public health services, which is to provide equitable access to health care for everyone.

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