been adopted, with variations and extensions, in several recent World Bank studies on the distributive impact of tax policies, such as (Inchauste & Lustig, 2017) and (Hernández Oré, Sánchez, Sousa, & Tornarolli, 2018).

The study makes use of Mongolia’s Household Socio Economic Survey for year 2016 for this estimation of distributive impact of taxes and transfers. This survey allows for identification of some key fiscal policies with impact upon poverty and inequality: personal income tax (through questions on sources of income earned), value added tax and excise taxes (through pattern of consumption), social security contributions (through sources of income, particularly wages), direct transfers (through questions about reception of pensions and other social assistance transfers), and in-kind transfers (through information about attendance to public school or public health facilities). In addition, the survey also allows measuring the impact of indirect transfers such as subsidized interest rates to mortgage and regulated prices to household electricity and heating (through questions on home ownership and housing debt, as well as energy consumption patterns).

The fiscal policies included in this simulation exercise represent about 50 percent in central government fiscal revenues, and 42 percent of central government expenditures in year 2016. The HSES 2016 data get close to budgetary data in some items such as social benefits (nearly 80 percent of) and personal income tax (100 percent). On the other hand, HSES only captures 38 percent of social security contributions. In the case of VAT and excise taxes on alcohol and tobacco, HSES captures a lower volume than reported in administrative data: 57 percent in the case of the former and only 13 percent in the case of latter (see Table 1).

The tax-benefit incidence simulations are done assuming that Social Security contributions are fully paid by employees, personal income tax by income recipient and VAT/excise taxes by the consumer. No assumptions about tax evasion are adopted. In addition, administrative and capital expenditures are included in the redistribution of in-kind transfers (i.e., public education and health) (see Table 2). Expenditures in education and health are scaled-down to make administrative data more commensurate to survey data (more on this below).

# **<mark>Assumptions</mark>**

The analysis of the distributional impact of taxes and transfers considers the different income concepts and how taxes and transfers affect these concepts.<sup>13</sup> There are five primary income concepts used to reflect income before or after transfers and taxes: Market Income, Net Market Income, Disposable Income, Consumable Income, and Final Income. A succinct definition of each of these concepts and the main taxes and transfers included in this study is summarized in Table 3.

Market Income is constructed as the summation of grossed-up wage income and other net market incomes. The HSES includes information on net wages, therefore, these wages are grossed-up by adding back in an estimated SSC employee contribution as well as personal taxes paid on wages, non-farm income, and rental incomes. A flat income tax of 10% is applied to all these sources of income and a 10 percent Social Security Contribution (capped at MNT 192,000 per month).

13 This section owes to the methods developed by (Lustig & Higgins, 2013) and (Lustig N. , 2017). MONGOLIA Distributional impact of taxes and transfers / May 2018 7