financing with funds from local revenues mainly for the top schools in their catchment areas. Consequently, such schools have strong reputations, and attract students and families from relatively well-off socioeconomic backgrounds (World Bank, 2018b).

Although health spending is progressive and equalizing in relative terms, in the sense that spending on health makes up a larger share of the incomes of the poor. However, it is not pro-poor in the sense that a larger share of spending accrues to the top of the distribution. The main reason for this is that households at the bottom of the distribution do not have access to basic health benefits (Figure 11). In fact, basic health benefits amount to 3

|Figure<br>Pri<br>|14.<br>mary|Pro<br>Sc|gre<br>ho|ssivity<br>ol (from|and<br>m|Redistribu<br>arket to fin|tive Effect of<br>al income)|
|---|---|---|---|---|---|---|---|
|0.0<br>0.2<br>0.4<br>0.6<br>0.8<br>1.0<br>1.2<br>Kakwani Index<br>Regressive <------------------><br>Progressive|Romania (2016)|Armenia (2011)|Ethiopia (2011)|Croatia (2014)<br>Indonesia (2012)|Jordan (2010)|Chile (2013)<br>Poland (2014)<br>South Africa (2010)|0.000<br>0.005<br>0.010<br>0.015<br>0.020<br>0.025<br>0.030<br>0.035<br>Marginal contribution to equity<br>(change in Gini points)|
||Ka|kwa|ni|Marg|inal|contribution||

Source: Armenia: Younger & Khachatryan (2017); Chile: Martinez Aguilar et al (2017); Croatia: Inchauste and Rubil (2017); Ethiopia: Hill et al (2017); Indonesia: Jellema et al (2017); Jordan: Alam et al (2017); Poland: Goraus & Inchauste (2016); South Africa: Inchauste <u>et al (2017); Romania: own estimates using 2016 HBS.</u> percent of GDP, with 33 percent of these benefits going to the bottom 40 percent. In contrast, minimum health benefits are progressive and pro-poor, with 87 percent of spending going to the bottom 40 percent of the distribution. However, these benefits are relatively small, making up only 0.1 percent of GDP.

# **VI. What is the impact of recent changes in taxes and benefits?**

Reforms introduced since 2016 were aimed at improving the social impacts of tax and benefit policies. The government cut the VAT tax standard rate from 20 to 19 percent in 2017. In addition, the PIT rate was cut from 16 to 10 percent beginning in 2018 and the tax-free allowance was raised. The government also substantially changed the structure of social contributions by shifting their burden almost entirely to the employees beginning in 2018.<sup>21</sup> Here we focus on the impact of the changes in the VAT and the PIT.

The reduction in the VAT rate only slightly reduced the VAT paid by all households, while the reduction in PIT was more substantial (Figure 15). The combined fiscal effect of these changes is estimated to lead to a 5.4 percent reduction in total revenue and a substantial increase in the primary deficit, holding all other economic variables constant. In terms of distributional impacts, the reduction in the VAT has had virtually no effect on fiscal redistribution. Value added taxes become slightly more regressive as measured by the Kakwani index (from -0.0955 to -0.0966). In fact, since richer households consume more, 37 percent of the

> 21 Beginning in 2017, social security and health contributions apply to the entire income earned. Health contributions for pensioners have been eliminated, as well as personal income taxes for pensions below RON 2 000 (EUR 440) (EC, 2017). In November 2017 the government adopted Emergency Ordinance No 79/2017 which changed contributions from 22.75 % for employers and 16.5% for employees to 2.25% and 35%, respectively.

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