67 percent of PIT and SSC, 54 percent of the VAT and 44 percent of excise tax collections. On the other hand, expenditures in transfer programs are mostly allocated to the poorest families. 60 percent of pensions budget and 48 percent of social welfare transfers are allocated to the bottom three deciles, respectively. The Child program is more equally distributed: almost all deciles - except the top and bottom- get approximately 10 percent of the budget of the program. Something similar is seen in terms of in-kind transfers in public health and in public education. Indirect subsides, however, how a regressive pattern in absolute terms: it is richer families who received the larger share of the budget. Almost 80 percent of the budget in subsidized interest rates on mortgages goes to the top three deciles, as well as 59 percent of subsidies in central heating and 39 percent of subsidies in electricity (Figure 3).

Total transfers, taken as a whole, are distributed such that the poorest garner the larger shares of the budget. The bottom decile gets 23 percent of the total budget in transfers. The rest of the population get similar shares of the budget in social expenditures: the second and tenth deciles get 11 percent of the budget each, while the other deciles garner around 8 percent each. This is due to pensions and social welfare transfers, which mostly contrate among the bottom two deciles, while subsidies to mortgage interests mostly concentrate in the top two deciles. On the other hand, contributions to tax collection rise from around 4 percent, from the bottom three deciles, to 28 percent from the top decile (Figure 4).

This progressivity is partly funded by corporate taxes, royalties and others government revenues. In monetary terms, all deciles of the distribution get more in transfers than what they pay in taxes, except the two richest deciles.<sup>22</sup> The total expenditure in transfers (monetary and in-kind) amounts to 4 trillion MNT in 2016. If indirect subsidies in mortgage interest, electricity and central heating tariffs were included, an additional 0.8 trillion should be added. But tax collections in PIT, VAT, SSC and excises is 3.2 trillion (see Table 1).<sup>23</sup> This means that 25 to 35 percent of redistribution though monetary and in-kind transfers is funded by taxes not collected form households and individuals.<sup>24</sup> Given the instability of royalties and corporate taxes related to mining commodity exports, sustainability of transfers depends crucially of responsible fiscal management.<sup>25</sup> Absolute progressivity can be summarized in the concentration index. The concentration index is defined as the twice the average difference between the cumulative proportion of the population ranked by market income, beginning with the poorest, and the cumulative proportion of a given tax (or transfer). The index ranges from -1 to 1 taking a negative value when the poorest groups of the population get a more than proportionate concentration of transfers, and a positive value when they get a share of transfers that is smaller than their share of population. A negative concentration index implies that they are progressive in absolute terms (i.e., the poorer groups get a larger share of total transfers), whereas a positive index means the transfer is regressive in absolute terms (i.e.,

> 22 This statement is based on survey data. Since survey data do not replicate the amounts of taxes and transfers from administrative data, the statement should be taken as an approximation, if survey data at least capture the relative proportion of taxes and transfers, although not its absolute levels.

> 23 These, in contrast to the previous footnote, are figures from administrative data.

> 24 This sentence, as the rest of the analysis of the paper, refers to statutory rather than economic incidence of taxes. 25 This statement mainly refers to short term sustainability. Longer term sustainability, particularly regarding pensions, requires adequate design in actuarial terms of the pensions system. For more on prudent fiscal <u>management and pension reforms in Mongolia see (World Bank, 2018).</u>

12 MONGOLIA Distributional impact of taxes and transfers / May 2018