percent of the household in the bottom four deciles have a mortgage loan, whereas in the top decile of the distribution more than 17 percent of the households have a mortgage loan. A similar pattern is observed regarding connections to central heating. Less than 10 percent of households in deciles 2 to 6 have connection to central heating, whereas households in deciles 7 to 10 have up to 60 percent connectivity. In electricity, the pattern is less pronounced, but also favors those at the top. The share of electricity connections rises from 70 percent for households in the 3<sup>rd</sup> decile to 90 percent for households in the 10<sup>th</sup> decile (see Figure 9). In the end mortgages have a very regressive impact because almost no household at the bottom of the distribution gets mortgage loans and the total amount of the subsidy is substantial (1.5 percent of GDP, see Table 1), whereas the electricity subsidies, although sizable as well, are more equitably distributed and households at the bottom of the distribution get quite high access.<sup>27</sup> If taking a socio-demographic perspective, the elderly is the group most favored from the tax-andtransfers system in Mongolia. Elderly population, and families with elderly members, as well as households with out-of-labor force household heads (which are usually pensioners) are the demographic groups with the largest poverty rate reduction because of tax-and-transfer policies. Other demographic groups, such as couples with children or households with active household heads see much smaller reductions in poverty rates. A small regional bias is observed in terms of redistributive impact as Ulaanbaatar, followed by Aimag and Soum centers, has a larger fall in poverty rates than rural areas in the countryside because of tax-and-transfer policy. (see Table 7).

# **V. Some international comparisons and policy implications**

The literature on international comparisons regularly indicates an equalizing effect of tax-andtransfer systems. In general, this effect is found large in developed countries when compared to developing countries (e.g. OECD vs Latin America) and mostly driven by social expenditures rather than by taxation.<sup>28</sup> This analysis of the Mongolia fiscal redistribution effect shows a similar pattern: direct monetary transfers like pensions, Child money and in-kind transfers in basic education have a marginal effect in reducing inequality of 3.4, 1.2 and 1.2 Gini points. In contrast, personal income tax reduces inequality by only 0.7 Gini points and Social Security contributions by only 0.4 Gini points (see Table 6).

Mongolia has features in its redistributive fiscal system like other developing countries. Using the same methodology, comparison with eight countries studied by (Inchauste & Lustig, 2017) shows that Mongolia has, in most cases the same direction of impacts. That is, direct taxes and transfers as well as in-kind transfers reduce inequality. The exception is indirect transfers in Mongolia which, in contrast to other countries, have an inequality-increasing effect. In terms of magnitudes, the redistributive effect of Mongolian taxes and transfers stands in the middle of the effects observed in the countries of the comparison. For instance, public health reduces inequality in

> 27 The volume of subsidies allocated by the Mongolian government to electricity and heating companies is not explicit in official publications like the Mongolian Statistical Yearbook or Mongolian Information System. This study estimates, using the methodology explained in section III, that nearly 400 billion MNT is the value of the difference between production costs and tariffs for electricity and heating. This would represent about 1.7 percent of GDP in 2016.

28 Recent studies are: (Hanni, Martner, & Podestá, 2016), (Goni, López, & Servén, 2011) and (OECD, 2008). MONGOLIA Distributional impact of taxes and transfers / May 2018 16