Cambodia is not alone in having fiscal policies that leave the poor out-of-pocket in the short-term. Fiscal policy (excluding in-kind transfers) increases the short-term poverty headcount ratio in most developing countries. Most fiscal systems in these countries rely heavily on indirect taxes. For instance, Tanzania generates 60 percent of its revenues from indirect taxes (Younger et al. 2016). Cambodia’s fiscal system is similarly reliant on indirect taxes, with revenues collected through consumption taxes (value-added tax and excise duties) amounting to twice the revenues collected through income taxes. Although excise duties cover socially costly goods such as alcohol and tobacco, these taxes also cover necessary goods, such as bottled water and communication services (telephone and internet). Most necessities such as meat, seafood, grains, and fruit are exempt from VAT. However, nearly every person is affected by the Cambodian indirect tax system because at least one of the items she consumes regularly has an implicit or explicit indirect tax. Net purchasing power for households along the income distribution therefore decreases after receiving transfers (direct and subsidies) and paying taxes (direct and indirect). Although many lower middle-income countries have fiscal systems that increase poverty, others perform better (Figure 11).

Figure 11: Fiscal policy’s impact on poverty headcount ratio across countries <!-- Start of picture text --> 10<br>Market to Disposable Market to Consumable<br>5<br>0<br>-5<br>-10<br>-15<br>High income Upper middle income Lower middle income Low<br>income<br>Percentage point change<br>Poland Panama Chile Uruguay Iran, Islamic Rep. Ecuador Mexico Jordan Paraguay Russian Federation Mexico Mexico Belarus Russian Federation Indonesia South Africa Colombia Peru Argentina Costa Rica Peru Venezuela, RB Dominican Republic Colombia Guatemala Brazil Albania Armenia Tunisia El Salvador Honduras Bolivia Nicaragua Ghana Cambodia Sri Lanka Tanzania Uganda Ethiopia Burkina Faso<br><!-- End of picture text --> Source: CEQ and World Bank databases and World Bank calculations (see World Bank, 2022b). Note: Pensions as deferred income treatment. Relevant international poverty line used for income classes: US$1.90 for LIC, US$3.20 for LMIC, US$5.50 for UMIC and HIC.

Fiscal policy has larger repercussions on rural than urban poverty in Cambodia. Areas with higher levels of pre-fiscal poverty are disproportionately impacted. In other words, the net benefits of the fiscal system are less concentrated in rural and other urban areas where more individuals are impoverished. This is largely due to the impact of indirect taxes. The modelling indicates that the current (pre-COVID) fiscal system increases short-term poverty in rural areas by 2.5 points (Figure 12), higher than the 1.8 points in non-Phnom Penh urban areas, primarily driven by indirect taxation. The larger tax result reflects the greater rate of near-poor in rural areas before fiscal policy, meaning they are more likely to fall under the poverty line when indirect taxes are paid. Notably, three features of rural life are accounted for the results: (i) home production of food and other staples is not subject to indirect taxation; (ii) current preferential indirect tax rates and exemptions are modelled; and (iii) indirect taxes on food expenditures are modeled 19