metadata: authors: 0: author: Fuchs Tarlovsky,Alan
1: author: Matytsin,Mikhail
2: author: Nozaki,Natsuko Kiso
3: author: Popova,Daria
count: Armenia,Belarus,Georgia,Kazakhstan,Moldova,Russian Federation,Tajikistan,Ukraine
docna: 0: docna: Distributional Impacts of Taxes and Benefits
            in Post-Soviet Countries
docty: Policy Research Working Paper
subtopic: Inequality,Economic Adjustment and Lending,Macro-Fiscal Policy,Public Sector Economics,Public Finance Decentralization and
            Poverty Reduction,Disability,Access of Poor to Social Services,Services & Transfers to Poor,Economic Assistance,Educational Sciences
teratopic: Public Sector Development,Social Protections and Labor,Poverty Reduction,Macroeconomics and Economic Growth,Education
abstracts: cdata!: This study compares the distributional
            impacts of the main tax and social spending programs in
            eight countries of the former Soviet Union (Armenia,
            Belarus, Georgia, Kyrgyzstan, Moldova, the Russian
            Federation, Tajikistan, and Ukraine) by applying a
            state-of-the-art fiscal incidence analysis based on the
            Commitment to Equity methodology. The region is highly
            interesting due to a unique combination of strong elements
            of path dependency (socialist legacies) with radical
            liberalization and welfare state retrenchment. The study
            examines the actual outcomes in terms of inequality and
            poverty and assesses the extent to which these outcomes can
            be attributed to various welfare state policies in these
            countries. It examines the extent to which taxes and social
            spending are progressive (whether the average transfer
            declines with income) and equalizing (whether they reduce
            inequality). In contrast to the majority of fiscal incidence
            studies, which are typically limited to the assessment of
            the impact of direct taxes and transfers, the study
            estimates the cumulative impact of the tax-benefit system as
            a whole, including direct and indirect taxes, cash
            transfers, and transfers in kind such as public education
            and health care.
geo_reg_key: 517208,545134,517191,82689,517198
repnme: repnme: Distributional Impacts of Taxes and
            Benefits in Post-Soviet Countries
display_title: Distributional Impacts of Taxes and
            Benefits in Post-Soviet Countries
listing_relative_url: /research/2021/10/33469617/distributional-impacts-taxes-benefits-post-soviet-countries
topicv3: Poverty m1326687 695,Education m1327048 470,Fiscal Policy m1327144 445,Cash Transfers m1327437 1608,Commitment to Equity m1939413 4816
publishtoextweb_dt: 2021-10-06T00:00:00Z
dois: 10.1596/1813-9450-9795
historic_topic: Public Sector Development,Social Protections and Labor,Poverty Reduction,Macroeconomics and Economic Growth,Education
origu: EFI-ECA-POV-Poverty and Equity (EECPV)
no_of_pages: 21
author_keys: 0: author_key: 1107738
1: author_key: 1160937
2: author_key: 716725
3: author_key: 888664
model_extractions: Policy Research Working Paper 9795 Distributional Impacts of Taxes and Benefits in Post-Soviet Countries _Alan Fuchs Mikhail Matytsin Natsuko Kiso Nozaki Daria Popova_ Poverty and Equity Global Practice October 2021
Policy Research Working Paper 9795

# **Abstract**

This study compares the distributional impacts of the main tax and social spending programs in eight countries of the former Soviet Union (Armenia, Belarus, Georgia, Kyrgyzstan, Moldova, the Russian Federation, Tajikistan, and Ukraine) by applying a state-of-the-art fiscal incidence analysis based on the Commitment to Equity methodology. The region is highly interesting due to a unique combination of strong elements of path dependency (socialist legacies) with radical liberalization and welfare state retrenchment. The study examines the actual outcomes in terms of inequality and poverty and assesses the extent to which these outcomes can be attributed to various welfare state policies in these countries. It examines the extent to which taxes and social spending are progressive (whether the average transfer declines with income) and equalizing (whether they reduce inequality). In contrast to the majority of fiscal incidence studies, which are typically limited to the assessment of the impact of direct taxes and transfers, the study estimates the cumulative impact of the tax-benefit system as a whole, including direct and indirect taxes, cash transfers, and transfers in kind such as public education and health care.

This paper is a product of the Poverty and Equity Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at afuchs@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
Distributional Impacts of Taxes and Benefits in Post-Soviet Countries Alan Fuchs<sup>a</sup> , Mikhail Matytsin<sup>a</sup> , Natsuko Kiso Nozaki<sup>a</sup> and Daria Popova<sup>b</sup> a The World Bank b Institute for Social and Economic Research, University of Essex

**Keywords** : tax-benefit policy, fiscal incidence, welfare state, income distribution, redistribution; CIS; post-Soviet countries; Former Soviet Union

**JEL classification** : H22, I38, D31
# 1. Introduction

Most research on the redistributive impacts of public policies has been conducted on the established welfare states – the members of the European Union (EU) or high-income members of the Organisation for Economic Co-operation and Development (OECD) (for instance, see Gornick and Smeeding (2018), Bussolo, Krolage et al. (2019), OECD (2015), Paulus and Tasseva (2020)), The research tools and methods recently developed by the Commitment to Equity (CEQ) Institute<sup>1</sup> allowed similar analysis to be undertaken for a number of low- and middle-income countries across the world (Lustig 2016, 2017, 2018). As far as the Former Soviet Union countries are concerned, apart from the Baltic countries, there are few comparative studies available (most recent studies include World_Bank (2005), Weigand and Grosh (2008)). The region, however, is highly interesting due to a unique combination of strong elements of path dependency (socialist legacies) with radical liberalization and welfare state retrenchment in the 1990s.

This paper discusses the role that tax and benefit policies play in reducing inequality and poverty in eight post-Soviet countries (Armenia, Belarus, Georgia, Kyrgyzstan, Moldova, the Russian Federation, Tajikistan and Ukraine) circa 2015 and evaluates their performance in a comparative way. Analysis is based on the incidence analysis under the Commitment to Equity (CEQ) framework that assesses the distributional impact of a country’s taxes and transfers (Lustig 2018). Data comes from the existing CEQ analyses conducted by the World Bank separately for each country. First, to provide context for the subsequent analysis of the tax-benefit policies, we look at the trends in growth, inequality and poverty in these countries over the past three decades. Second, we quantify the impact of the tax-benefit systems on inequality and poverty and compare it across the eight countries. Third, we examine in detail the extent to which taxes and social spending in these countries are progressive (i.e., whether the average transfer declines with income) and equalizing (whether they reduce inequality and poverty). We conclude with a discussion as regards to how the redistributive capacity of the systems can be enhanced.

The contributions of this paper are four-fold. First, we examine actual outcomes in terms of inequality and poverty and assess the extent to which these outcomes can be attributed to various welfare state policies. This is in contrast with other studies on the post-Soviet welfare states which focused on the analysis of institutional indicators (Manning and Tikhonova 2004, Cook 2007, Cerami 2009, Cook 2010, Cook 2010). Second, we estimate the cumulative impact of the whole tax-benefit system (including direct and indirect taxes, cash transfers and transfers in kind such as public education and health care). Most studies of the redistribution in rich countries and beyond focused on the impact assessment of cash transfers and direct taxes (e.g. Gornick and Smeeding (2018), Bussolo, Krolage et al. (2019), OECD (2015), Paulus and Tasseva (2020)), leaving substantial parts of the welfare state out of scope of the analysis. Third, since all the country studies used in this paper applied the CEQ approach, the results are fully comparable across the countries. Fourth, the existing cross-country studies using the CEQ methodology has not yet covered countries of this region (Lustig 2016, 2017, 2018).

The remainder of the paper is organized as follows. Section 2 provides an overview of the trends in growth, poverty and inequality over the past decades. Section 3 describes the methodology and data. Section 4 presents the results of the analysis, by looking at the similarities and differences in the design and efficiencies of tax and spending policies in the eight countries under study. In the final section we discuss the findings and options for the reform of expenditure and tax policies in these countries to help achieve distributive objectives in an efficient manner, that are consistent with fiscal sustainability and longer term goals.

# 2. Trends in Growth, Inequality and Poverty in Post-Soviet Countries

Figure 1 highlights the wide heterogeneity across countries at the onset of the Soviet collapse, with significant gap between the Russian Federation and the rest of the former Soviet Republics. The GDP per 2
<!-- Start of picture text --> GDP per capita, USD in 2011 PPP terms<br>30000<br>25000<br>20000<br>15000<br>10000<br>_9_~o— 9<br>5000 Se=<=<br>LL —— — ———<br>Oe ooa eee ——— i | ee<br>0<br>PPMPPS YF? PPMA? MMOF MIPKP MP LMMDP GD YGKL KLMMF GF MPLHL HM MKHF SKGM HKPHPH PeFOPH HMMPgH gy& otyg<br>=—@—ARM =—@BLR =®=GEO =—@=KYG =@=MDA =@®=RUS =<@=TJK =—@=UKR<br><!-- End of picture text -->
<!-- Start of picture text --> Poverty Headcount<br>Poverty Line = $3.2 (2011 PPP)<br>90%0, 87.1%<br>80% 77.6%<br>70% 69.5% ee<br>60%<br>55.6%<br>40%50% 39.1% 46.9% S\<br>. x<br>Je 37.1% = :<br>50% yy \ > WE ~<inN<br>‘ —3—3<br>10% —~<br>—*<br>0% —<br>SPLV > PF& HMOm © KMNSN GFSD s >+ Y@ 8& SS so se SFPQJ oS DDggOD SN pr’Dw pg?DO ghak p’HO gi?WO gtsYW<br>—e@-ARM -®-BLR —®-GEO -—®-KYG =—®=MDA =—®=RUS —®-TJK =—®=UKR<br><!-- End of picture text -->
<!-- Start of picture text --> Gini Index<br>0.5 - 0.48 -<br>0.46<br>0.45 - mre aa<br>Wwe <\<br>A<br>—_ = . SePoE SACYSA A<br>= v ao<br>————[—7]~YoOqo>qnana a —I—<br>025 i ie oa =<br>0:2 -<br>PHP) > FPFoo io IF<\ FPF> ~ FM<y FF FF> & Fg<\ CJ ghS) grNy ppa % pg&® prSe) pr?6 ph“A 9><br><!-- End of picture text -->
<!-- Start of picture text --> The gap between the rich and the poor in our country should be reduced<br>100%<br>20.6% 1S:6%569 14.0%:<br>26.8% 28.1% 27.8% 26.5%<br>80%<br>60% 77.3%<br>53.4% 55.8% 37.2% _—=36.5%<br>40% —<br>20% — — — — — — —<br>14.7%<br>ARM TIK KYG GEO RUS UKR MDA BLR<br>m Strongly disagree = Disagree Neither disagree nor agree m Agree m Strongly agree<br><!-- End of picture text -->
indirect taxes (value added tax or VAT and excises) and adding subsidies, we arrive at _post-fiscal_ or _consumable income_ which reflects the actual amount of market goods and services consumed by households. Our _final income_ includes the cash equivalent of the cost of public health and education services consumed by households.

This paper analyzes the redistributive and poverty-reducing effect of the tax-benefit system under the assumption that pensions are treated as direct transfers, while contributions to the pension system are subtracted from gross income. This is based on the nature of the pension system in many of the countries considered for the analysis. In particular, the PAYG system formed in the Soviet Union has undergone reforms in the 2000s aimed at adding contributory pillars. This resulted in a divergent mix of pension systems in the region, but with one common feature – the weak link between contributions and actual pensions payments (Grishchenko 2016). Thus, it is more natural to consider pensions as transfers similarly to other contributory programs (such as unemployment benefits).

The analysis used here is point-in-time and does not incorporate behavioral or general equilibrium effects. The analysis is based on economic rather than statutory tax incidence. For example, it is assumed that personal income taxes and contributions by employees and employers are borne by labor in the formal sector. Individuals who are not contributing to social security are assumed to pay neither direct taxes nor contributions. Consumption taxes are fully shifted forward to consumers. According to the common practice adopted in the region, the welfare indicator used is income per capita. Finally, it is worth noticing that CEQ analysis relies as much as possible on information about social transfers and taxes reported in the survey. Therefore, corporation taxes cannot be included in the analysis. If the survey does not include questions on certain items, the values are either simulated or imputed. Because the survey data is being used for the assessment of taxes and benefits, the annual amounts of tax revenues and social spending do not necessarily coincide with those found in other sources, in particular National Accounts.<sup>a</sup> We focus on the redistributive role of tax and benefit policies as one of the underlying forces behind the disparities in poverty and inequality rates across the FSU countries. Poverty is measured using the LowerMiddle-Income Class Poverty Line of the World Bank. Depending on the year in which a CEQ study for each country was conducted it is equal to either $2.5 or $3.2 per person per day at 2011 PPP values.<sup>2</sup> Inequality is measured using the Gini coefficient. The _distributive impact_ of a tax or a transfer is measured as the marginal reduction in inequality/poverty due to a tax or a transfer, i.e. the absolute change in Gini index/poverty headcount due to a removal of the transfer or the tax from household income (Reynolds and Smolensky 1977). Therefore, a positive value indicates that a tax or a transfer contributes to a decline in inequality/poverty, and otherwise. The extent of fiscal redistribution depends on the size of taxes and social spending (as share of the GDP) and on their progressivity.<sup>b</sup> _Progressivity_ refers to the degree to which tax burdens and benefit entitlements rise or fall with household income. The summary measure of progressivity is the Kakwani index (Kakwani 1977). The Kakwani index is equal to the difference between the Gini index for a tax/transfer, and the Gini index for incomes before application of the tax/transfer. Theoretically, the Kakwani index can vary between -1 to 1; the larger the index is, the more progressive is the expenditure or tax.

The data for comparative analysis comes from the CEQ analyses for separate countries produced by country teams at the World Bank that were available at the time of writing: Armenia (World_Bank 2016), Belarus (Bornukova, Shymanovich et al. 2017), Georgia (Cancho and Bondarenko 2017), Kyrgyzstan (Ismailakhunova, Shymanovich et al. 2019), Moldova (Cojocaru, Matytsin et al. 2019), Russian Federation

> a Wherever possible, the analysis relies on the results from the CEQ based on household surveys from respective countries. When estimates are unavailable from the CEQ results, the analysis depends on other sources, such as national accounts reported in publicly available sources.

> b Size of taxes and social spending is derived either from CEQ results or from national accounts available from publicly available sources.

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<!-- Start of picture text --> Gini index, % Poverty headcount, %<br>60% 45%<br>50.7% 39.2%<br>48.0% 48.5% ° 40%<br>50%<br>jomm 83% 35% 32.6%<br>40% 36.3% 37.8% 30% oom §<br>. 25%<br>30% 20.0%<br>31.6% 32.4%$ l 38.3% - 29.0% 23.3%<br>90%70% ot|. 1% 27.5% 27.2% 22.3% 29 .69%.680 30.0%° 20%1%10%70Z 8.3% 15.5% 20.3% ~<br>10% 10.6%<br>5%<br>0% 0% 1.1% @Q 0.6% 6.0%°<br>KYG TIK ARM BLR UKR MDA RUS GEO BLR RUS UKR TIK KYG MDA ARM GEO<br>(2016) (2015) (2014) (2015) (2016) (2017) (2014) (2013) (2015) (2014) (2016) (2015) (2016) (2017) (2014) (2013)<br>@MarketIncome @DisposableIncome @ConsumableIncome Final Income @ Market Income @Disposable Income @Consumable Income<br><!-- End of picture text -->
Impact of the tax-benefit systems on inequality at consumable income varies from 3pp in Tajikistan to around 10 pp in Georgia, Armenia and Kyrgyzstan, and to 14-16 pp in Belarus, Russia and Moldova. In Russia, out of all the countries, significant additional reduction in inequality is achieved through the provision of in-kind benefits. Overall, the most considerable redistributive effort is undertaken by Ukraine, where inequality between market and consumable income is reduced by 18pp.

Absolute poverty at consumable income is negligible in Belarus, Russia and Ukraine. In Kyrgyzstan and Moldova, it remains at around 10% of the population. Poverty headcounts at consumable income remain at an extremely high level (25% and more) in Armenia, Georgia and Tajikistan. In all these countries poverty headcounts for consumable income are higher than those for disposable income, indicating fiscal impoverishment due to consumption taxes on basic goods paid by the poor (Higgins and Lustig 2016). Armenia and Tajikistan appear to be clear outsiders in terms of poverty reduction. In particular, in Tajikistan poverty headcount at consumable income is even higher than market income poverty headcount.

# 4.2 Government Revenues

This section looks at how inequality and poverty in the eight countries is being affected by government revenues. Figure 7 shows that total tax revenue as well as total revenue as a percentage of GDP are low in Armenia, Kyrgyzstan and Georgia, with total revenue not exceeding 30% of the GDP. In Belarus, Russia, Ukraine and Moldova, general government revenue (expressed as total revenue in red in Figure 7) exceeds 35% of GDP. According to the IMF, the average tax ratios for advanced economies exceed 30% of GDP, while tax ratios in developing economies (excluding emerging Europe) generally fall in the range of 15– 20% of GDP (IMF 2014). The causes of low tax revenues are related to the structure of the economy, for example, size of public sector, large share of jobs in informal sector, weak institutions and to sociological and cultural factors such as a poor norm for compliance (Besley and Persson 2014).<sup>c</sup>

> c In addition, some countries keep their tax burdens low intentionally to increase attractiveness to domestic and foreign investors.

9
<!-- Start of picture text --> Size of Fiscal Revenue from Taxes<br>50<br>43.3<br>45<br>37.5 38.0<br>40 35.6<br>33.2 36.7<br>35 30.3 33.0 4.1<br>27.4 28.0 2.5<br>30 24.3 2.8<br>2.7 12.0 11.2<br>25 23.0<br>20 17.9 19.7 3.6 21.3 0.9 21.4 3.4 4.3<br>5.6 0.3 7.2 6.0<br>15 7.1 1.8 6.0 10.3 25.1 6.0<br>10<br>3.8 2.4 17.1<br>5 7.0 12.6 11.4 13.3 6.9 9.0<br>0 -0.4<br>2014 2016 2014 2013 2017 2015 2016 2015<br>-5<br>RUS KYG ARM GEO MDA TJK UKR BLR<br>Indirect Taxes PIT SIC Other direct Taxes Total Revenue Total Taxes<br>% of GDP<br><!-- End of picture text -->

# **Figure 7** : Share of Major Revenue Sources in the GDP

_Source:_ Authors’ calculations using CEQ Master Workbooks (MWBs).

_Note_ : Figures in black bold are governments’ total revenues from taxes comprising PIT, SIC, other direct taxes and indirect taxes. Countries are sorted in the ascending order of the total revenues from taxes. Total revenues in red are general government revenues which also includes social contributions (which Armenia and Georgia don’t have in referenced years) as well as oil revenues (which are sizeable in Russia) and other revenues (sizeable in Belarus). In Armenia, since social contribution had been implemented in 2014 and fully introduced in 2018, they are not reflected in the figure and in the analysis.

Not only overall tax revenues but also tax structures vary significantly across the eight countries, reflecting different stages of development of the fiscal system and administrative capacities. Fiscal revenue relies heavily on personal taxes in all countries apart from Russia, where the gap between total revenue and revenue from personal taxes is attributable to sizable corporate taxes and oil revenue (Popova, Matytsin et al. 2018). Indirect taxes are dominant source of revenue in Armenia, Kyrgyzstan, Georgia and especially in Tajikistan where they constitute over 75% of total tax revenues. In Moldova and Ukraine, a major part of tax revenues comes from personal direct taxes.

As demonstrated by Figure 8, direct taxes are progressive and indirect taxes are regressive in all countries with the exception of Armenia, where indirect taxes are neutral and direct taxes appear to be regressive. Georgia, Kyrgyzstan, Moldova, Tajikistan and Ukraine have relatively more progressive direct taxes and contributions, in comparison to the rest of the countries. However, Kyrgyzstan is the only country in the sample where the tax system as a whole can be considered progressive. In all other FSU countries, the tax systems are regressive.

Personal income tax (PIT) is typically the most progressive component of direct taxation. There are, however, important structural differences across the FSU countries, namely, flat rates are applied in all countries except for Armenia and Moldova<sup>3</sup> . The rates vary from 10% in Kyrgyzstan, to 13% in Russia, Belarus and Tajikistan, 18% in Ukraine and 20% in Georgia. Literature suggests that in general, flat PIT is not the best structure to enhance the redistributive impact but combined with exemption for low-income earners, PIT is progressive in all countries which adopt flat rates (Keen, Kim et al. 2008). Low progressivity of direct taxes in Armenia, Russia and Belarus is low due to lack of exemptions for low-income earners.

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<!-- Start of picture text --> Kakwani Index<br>0.200“Ta n. I<br>000 ; | ; = 7 ‘ | a a 7 |<br>-0.200<br>-0.300<br>-0.400<br>MDA UKR BLR GEO RUS ARM TJIK KYG<br>=PIT mSIC @ Indirect Taxes m All Taxes and Contributions<br><!-- End of picture text -->
<!-- Start of picture text --> Direct Taxes and SIC Indirect Taxes<br>30.0 30.0<br>25.1<br>25.0 24.0 25.0<br>s00 19.6 20.0 a<br>16.1<br>15.0 9.9 10.8 15.0 9.0 na- 126 13.3<br>10.0 a1 8.1 100 6.9 7.0<br>5.2<br>0.0 e . 0.0 ry ° °<br>-5.0 e e -5.0 > ve > o<br>-10.0 -10.0<br>TIK KYG GEO ARM RUS MDA BLR UKR MDA = RUS UKR ARM _ KYG GEO BLR TJK<br>TM% of GDP © Gini index (pp) © Poverty headcount (pp) TM% of GDP Gini index (pp) Poverty headcount (pp)<br><!-- End of picture text -->
<!-- Start of picture text --> Size of fiscal spensing on transfers, percent of the GDP<br>45 41.0<br>40 38.3 38.4 rs<br>36.3 e e<br>35 31.8 °<br>30 29.3 e<br>25.0 ~ ° 25.1 24.9<br>25 oa 22.7 2<br>= 19.5 3.0<br>20 15.9 16.4 6.4 cis 53<br>2.3 4.3<br>15 11.6 = 2.4 11.7 4.8 3.9 ><br>0 2.8 6 2.2; 5.2 4.5 9.3 3.2 2.5<br>18 6.2 : _<br>° is _ 71i: 7.3<br>0<br>GEO ARM KYG TJK MDA UKR RUS BLR<br>5<br>= Contributory pensions Other direct transfers mHealthcare mEducation sIndirect subsidies Total Spending<br>Kakwani Index<br>0.90<br>0.80<br>0.70<br>0.60<br>0.50<br>0.40<br>0.30<br>0.20<br>0.10 1 i<br>0.00 iz<br>-0.10<br>ARM KYG TIK BLR GEO MDA RUS UKR<br>@ Direct transfers. incl contributory pensions @ Indirect Subsidies<br>= Education transfers = Health transfers<br>= All transfers<br><!-- End of picture text -->
<!-- Start of picture text --> Direct Transfers Indirect Transfers<br>30.0 30.0<br>°<br>25.0 25.0<br>20.0 20.0<br>8 16.5<br>15.0 15.0 12.8<br>10.2 12 113 1s 191 12<br>10.0 ° e 10.0<br>+- 8.2 8.6<br>6.1 5 55 6.2<br>4.5 47 5.5<br>5.0 A 5.0<br>0.0 e 0.0 :<br>“5.0 -5.0<br>TIK GEO KYG ARM RUS MDA BLR UKR ARM GEO KYG TJIK RUS UKR MDA BLR<br>% of GDP @ Gini index (pp) @ Poverty headcount (pp) =%ofGDP @Giniindex(pp) —_@ Poverty headcount (pp)<br><!-- End of picture text -->
Our analysis points at the wide heterogeneity across the eight countries at the onset of the Soviet collapse, with significant gaps between Russia and the rest of the former Soviet Republics in terms of the GDP per capita. Common economic trends across all economies have been the drastic surge in poverty and inequality followed by economic growth and declining trend in poverty over time, not necessarily accompanied by a reduction in inequality. With respect to their current poverty rates (measured at $3.2 dollars a day) and inequality levels, the eight countries can be classified into four groups: Armenia, Georgia and Tajikistan are countries associated with both relatively high poverty and inequality; Russia – with high inequality but with low poverty; Kyrgyzstan – with low inequality but high poverty; Ukraine, Moldova and Belarus – with relatively low poverty and low inequality.

The cross-country variation in the impacts of tax-benefit systems on inequality and poverty is very large. The welfare systems of Ukraine, Belarus, Russia and Moldova appear to perform better in terms of inequality reduction, compared to the other four countries, with the smallest impact being observed in Tajikistan. In terms of poverty reduction, the countries can be divided into three clusters, with Armenia, Georgia and Tajikistan being the outsiders, Moldova and Kyrgyzstan achieving moderate poverty reduction, and Belarus, Russia and Ukraine reducing absolute poverty to negligible levels.

The size of revenue from personal taxes is moderate except for Belarus, where it exceeds the average for advanced economies. Among tax revenues, reliance on indirect taxes is high on average. However, tax structures vary significantly across the countries, reflecting different stages of development of the fiscal system and administrative capacities. Despite huge differences in the magnitude of the effects, as expected, direct taxes are overall progressive and inequality/poverty reducing and indirect taxes are regressive and inequality/poverty increasing. In all countries, except for Kyrgyzstan, the tax systems are regressive due to the flat PIT rates and high share of revenues from indirect taxes.

The share of government spending allocated to social transfers is equivalent to the average for advanced economies only in three of the countries (Moldova, Ukraine and Belarus). In Georgia, Armenia, Kyrgyzstan and Tajikistan, this is the result of low revenues, but Russia’s spending on transfers is lower than it could have been given the revenues and total social spending.<sup>d</sup> All types of transfers are progressive, but direct transfers are more so compared to indirect transfers. Ukraine, Russia and Moldova have the most progressive systems of direct transfers and the most progressive transfer systems overall. Direct transfers improve poverty and inequality in all countries where estimates are available, while the impact of indirect transfers on poverty and inequality is limited.

All the countries included in this study have a scope to scale up the redistributive impact of their tax-benefit systems by increasing the government revenues and spending. Countries with high debt or fiscal deficits must first generate fiscal space to scale up redistribution through the fiscal system. Successful fiscal adjustments are also beneficial in creating the fiscal space for countercyclical policy responses to unforeseen shocks such as the Covid-19 pandemic.<sup>e</sup> Options for enhancing the redistributive impacts of taxes and benefits in post-Soviet countries through the design of policies include: (i) increasing spending on direct non-pension transfers, with a gradual phasing out of benefits as incomes rise to avoid adverse effects on employment; (ii) raising retirement ages in pension systems; (iii) improving the access of lower-income groups to higher education; (iv) expanding

> d It should be noted that in principle, spending decisions in resource rich countries like Russia may not be linked directly to revenues in the current period, as some revenues need to be saved for inter-generational solidarity and to reduce volatility.

> e The average additional spending required for emerging market economies to achieve progress on the Sustainable Development Goals (SDGs) endorsed by the United Nations is estimated at around 4 percentage points of GDP (Gaspar, Amaglobeli et al. 2019).

15
coverage of the personal income tax and implementing progressive PIT rate structures;<sup>f</sup> (v) reducing regressive tax exemptions; and (vi) greater use of taxes on property. However, the optimal level of redistributive spending would differ by country which shall be consistent with fiscal sustainability in the long run.

6. References Benicio, D. F., W. Seitz, J. Jellema and M. Goldman (2021). The Effects of Fiscal Policy on Poverty and Inequality in Tajikistan. Commitment to Equity (CEQ) Working Paper No. 108.

Besley, T. and T. Persson (2014). "Why Do Developing Countries Tax So Little?" Journal of Economic <u>Perspectives</u> **28** (4): 99-120.

Bornukova, K., N. Leshchenko and M. Matytsin (2019). Fiscal Incidence in Ukraine: A Commitment to Equity Analysis. Policy Research Working Paper 8765. Washington, DC, The World Bank. Bornukova, K., G. Shymanovich and A. Chubrik (2017). Fiscal Incidence in Belarus: A Commitment to Equity Analysis. IPM Research Center Working Paper WP/17/01, BEROC Working Paper No. 42, IPM Research Center and BEROC Center for Economic Research.

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f In countries with a large informal sector or in which tax avoidance is pervasive, the priority may be to simplify the tax system. Low-income deductions may also be effective to increase the tax base, especially to activate vulnerable groups, such as the long-term unemployed and youth.

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