Net Market Income is the result from subtracting direct taxes and SS contributions from Market Income. Direct taxes are applied to market income with deductions onto taxable income including SSC (employee contribution) and tertiary education expenditures. In addition, if direct taxes are less than 84,000 MNT per person per year, taxes are waived.

Adding all direct transfers to Net Income yields Disposable Income. Direct transfers include the totality of social transfers, pensions, and non-contributory income sources that are available from the HSES. Specifically, in the survey, these sources of income categories include pensions, unemployment benefits, maternity benefits, disability pension, survivor pension, illness pay, funeral pay, child allowances, HDF, student benefits, and other.

Applying indirect taxes and transfers to Disposable Income yields Consumable Income. Indirect taxes include VAT, Excise Taxes, while indirect transfers refer to Mortgage Subsidies, Electricity Subsidies, and Heating Subsidies. The former reduce the consumer power of disposable income, whereas the latter increase it.

Lastly, incorporating in-kind health and education expenditures to Consumable Income results in Final Income. This is a measure that aims at gauging the command on goods and services that a household has thanks to goods and services freely provided by the public sector in the form of inkind transfers.

# **<mark>Tax revenue sources</mark>**

Tax revenues included in the CEQ analysis are personal income taxes, value-added taxes, excise taxes, and social security contributions. Personal income tax and Social Security contributions are derived from the estimates of gross income explained in the previous sub-section. Indirect taxes rates are applied to household consumption in relevant categories. A VAT rate of 8.6 percent is applied to household consumption excluding rent, health, education, and alcohol, tobacco and consumption from own-production. A rate of 17.4 percent is applied to alcohol and tobacco consumption as an approximation to the excise taxes to these items. The VAT rate approximates the effective VAT rate defined as the actual VAT revenue collection divided by household consumption expenditures in years 2016. The excise tax is also an approximation, based on the ratio of excise taxes on tobacco and their market price.

No simulations about excise taxes on dual-fuel vehicles are included because no information on type of vehicle owned is available in the household survey. Moreover, no distributional impact of price controls and excise taxes on diesel and gasoline has been estimated because these have a more complex and ever-changing form of policy intervention.<sup>14</sup>

> 14 The Mongolian government exerts different types of intervention on the gasoline market. It changes excise taxes (including temporary exemptions), controls prices and sometimes even grants soft loans for importers, all with the objective to avoid wide oscillations of gasoline prices. Excise taxes to gasoline amount to 321 billion MNT in 2016 (about 1.3 percent of GDP). In any case, it does not seem to be the case that gasoline prices in Mongolia are far from <u>regional international prices.</u>

8 MONGOLIA Distributional impact of taxes and transfers / May 2018