metadata: authors: 0: author: Hounsa,Thierry
1: author: Coulibaly,Mohamed
2: author: Sanoh,Aly
count: Mali,Niger
docna: 0: docna: The Redistributive Effects of Fiscal Policy
            in Mali and Niger
docty: Policy Research Working Paper
subtopic: Inequality,Public Sector Economics,Macro-Fiscal Policy,Economic Adjustment and Lending,Public Finance Decentralization and
            Poverty Reduction,Educational Sciences,Health Care Services Industry,Public Financial Management
teratopic: Poverty Reduction,Macroeconomics and Economic Growth,Education,Industry,Public Sector Development
abstracts: cdata!: This study assesses the redistributive
            effects of fiscal policy in Mali and Niger. Fiscal policy is
            poverty increasing in Mali (by 2.4 percentage points) and
            Niger (2.5 percentage points). This is a result of primarily
            two factors: indirect taxes (value-added taxes and import
            duties) and direct fiscal transfers. Although the richest
            people in Mali and Niger pay the majority of indirect taxes,
            the poorest people pay a nonnegligible amount (more than 8
            and 10 percent for the bottom three deciles, respectively).
            Although existing direct fiscal transfers have
            poverty-reducing effects, they are too small (Mali) or not
            well targeted (Niger).
geo_reg_key: 517191,1927320
repnme: repnme: The Redistributive Effects of Fiscal Policy
            in Mali and Niger
display_title: The Redistributive Effects of Fiscal
            Policy in Mali and Niger
listing_relative_url: /research/2019/06/31165433/redistributive-effects-fiscal-policy-mali-niger
topicv3: Public Finance Management m1326316 716,Poverty m1326687 695,Education m1327048 470,Fiscal Policy m1327144 445,Health m1504661 3480
publishtoextweb_dt: 2019-06-17T00:00:00Z
historic_topic: Poverty Reduction,Macroeconomics and Economic Growth,Education,Industry,Public Sector Development
no_of_pages: 29
author_keys: 0: author_key: 1399401
1: author_key: 1220585
model_extractions: Policy Research Working Paper 8887 The Redistributive Effects of Fiscal Policy in Mali and Niger _Thierry Hounsa Mohamed Coulibaly Aly Sanoh_ Poverty and Equity Global Practice June 2019
Policy Research Working Paper 8887

# **Abstract**

This study assesses the redistributive effects of fiscal policy in Mali and Niger. Fiscal policy is poverty increasing in Mali (by 2.4 percentage points) and Niger (2.5 percentage points). This is a result of primarily two factors: indirect taxes (value-added taxes and import duties) and direct fiscal transfers. Although the richest people in Mali and Niger pay the majority of indirect taxes, the poorest people pay a nonnegligible amount (more than 8 and 10 percent for the bottom three deciles, respectively). Although existing direct fiscal transfers have poverty-reducing effects, they are too small (Mali) or not well targeted (Niger).

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 mhounsa@worldbank.org, mcoulibaly2@worldbank.org, and asanoh@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
# **The Redistributive Effects of Fiscal Policy in Mali and Niger**<sup>**1**</sup>

**Thierry Hounsa, Mohamed Coulibaly, and Aly Sanoh**

**Keywords** : fiscal policy, fiscal incidence, social spending, inequality, poverty, taxes

**JEL Classification** : H22, I38, D31

> 1 Thierry Hounsa, Mohamed Coulibaly, and Aly Sanoh (World Bank, Poverty and Equity Global Practice) prepared this report. The authors are extremely grateful to Johannes Hoogeveen, Gabriela Inchauste, Alejandro de la Fuente, Karolina Goraus, and Mathew Wai-Poi. The findings, interpretations, and conclusions of this paper are those of the authors.
<!-- Start of picture text -->
# of poor Mali<br>1390 1,413<br>me 1,237<br>1,200 1,085<br>w 1,000 881<br>E<br>5 800<br>8 600<br>F<br>249<br>400<br>200 150 ve<br>a OE<br>:<br>? 0 & > & ° PY yo<br>e ¥ ¥ £ F SF & &<br>e 9 & ev<br>0<br><!-- End of picture text -->

<!-- Start of picture text -->
# of poor Niger<br>2,500 ae<br>ool<br>2,000<br>d<br>c 1500 1,259<br>5 1,165<br>2 991<br>F 1,000<br>500<br>208<br>51 58<br>on Ed -<br>Agadez Diffa Dosso Maradi Tahoua Tillaberi Zinder Niamey<br><!-- End of picture text -->
other (e.g., inequality reduction but worsening poverty through fiscal policy). Nevertheless, in a context of limited financial resources in these countries, decisions must be made about which sectors are to benefit from greater public expenditure. For example, if many resources are devoted to energy subsidies, there will be fewer resources available for education, health, infrastructure, and other areas of government intervention. Energy subsidies are important for the modern industrial sector, but they benefit mainly nonpoor households. It is therefore important to identify the sectors for which public spending will lead to a significant reduction in poverty and inequality.

State public spending is financed partly from money that the government collects from households and other economic agents in the form of taxes. For households, paying taxes to the state reduces income and purchasing power. It must therefore be ensured that tax collection does not exacerbate inequalities or result in great deterioration in living conditions of vulnerable households.

The main focus of this report is how taxes and budget expenditures in Mali and Niger redistribute resources among the welfare quantiles. The objective is to prompt reflection on potential indicators that might help measure the contribution of fiscal policies to the reduction of poverty and inequality. It presents a fiscal incidence analysis using the Commitment to Equity (CEQ) Institute methodology to assess how taxes and spending distribute resources among the income deciles in Mali and Niger (Appendix A). One of the advantages of the CEQ methodology is that it allows an analysis of the contribution of taxes and public spending to reduction of poverty and inequality. It is possible that taxes are a source of inequality but that the redistributive effect of public spending will be sufficient to more than compensate for the inequalities that the taxation system causes such that, overall, the fiscal system<sup>2</sup> helps reduce inequality.

Our fiscal incidence analysis uses a partial equilibrium approach. It does not model the behavior of agents in response to different government fiscal interventions and does not consider general equilibrium effects. The data used came from the latest Integrated Survey on Agriculture ( _Enquête Agricole de Conjoncture Intégrée_ , EACI) and ( _Enquête nationale sur les Conditions de Vie des Ménages et Agriculture_ (ECVM/A), from 2014/15, and the national budget for 2014. We use simple notions of progressivity and the pro-poor nature of spending and taxes. A public expenditure (or tax) is progressive, in relative terms, if the proportion of expenditure (or tax) in relation to income decreases (increases) with household income. A public expenditure is pro-poor if it is progressive in absolute terms—in other words, if the absolute amount (e.g., per capita) of public expenditures decreases with household income.

The analysis had three broad results.

- (a) In both countries, poverty is high, but the gap between poor and wealthy is small, so rapid improvements could be made. The amount needed (under perfect targeting) to fully

> 2 The fiscal system includes taxes and public expenditures.

3
eliminate poverty through fiscal transfers to the poor is the same as currently received each year in official development assistance.<sup>3</sup>

- (b) Existing direct fiscal transfers have poverty-reducing effects but are too small (Mali) or not well targeted (Niger). In addition, significant expenditures are made on items that reduce poverty only slightly (e.g., subsidies).

- (c) Although direct taxes are progressive and reduce inequality directly by making postmarket incomes more equal and indirectly by financing pro-poor transfers and spending, the current formal tax base is small, so value-added taxes (VATs) will remain the main tax revenue source in the medium term, but VATs have significant povertyincreasing effects.

Various options exist to restructure fiscal policy to have a greater effect on poverty while remaining revenue neutral. These options require sequencing and a combination of redirecting some spending from subsidies to direct transfers, improving targeting of these transfers (Niger), and reducing the VAT or creating exemptions for goods and services that account for a significant share of poor household consumption. This can be made revenue neutral by reducing subsidy spending further or increasing the general VAT rate on nonexempt items.

The remainder of this report comprises the following sections: section 2 provides an overview of the Malian and Nigerien fiscal framework, section 3 presents the results with respect to the progressivity of taxes and expenditures, section 4 analyzes the overall effect of fiscal policy on poverty and inequality, and section 5 concludes.

# **2. Fiscal Framework**

The structure of government revenue in the Malian and Nigerien budgets is similar to that of other countries in West Africa, with a predominance of (indirect) taxes on goods and services. This partly reflects the lower (direct) tax pressure in these (developing) economies than in moredeveloped countries. Indirect taxes account for more than one-third of total revenue in these two countries, whereas taxes on income, profits, and property accounted for less than one-fourth of total revenue in 2014 (figure 2). In principle, it is possible to analyze fiscal incidence from a budget revenue standpoint, but this report focuses on the wage and salary tax (WST) and taxes on goods and services, including VATs, import taxes, and other indirect taxes.

> 3 With poverty gaps less than 15 percent, the shortfall that needs to be made up for to bring every poor Malian and Nigerien up to each country’s national poverty line is USD657 million (5 percent of gross domestic product (GDP)) for Mali and USD832 million (11 percent of GDP) for Niger.

4
**Figure 2. Structure of Budget Revenue in Mali and Niger, 2014**

<!-- Start of picture text --> 31.2<br>26.4<br>24.4 23.7<br>15.5 16 16.3<br>9 8.7<br>5 4.4 7.2 6.5 5.7<br>Wages and Other direct Taxes on Goods Other indirect<br>Salary Taxes taxes and Services taxes<br>Personal and corporate taxes Indirect taxes Other taxes Non taxes Grants and<br>revenue others<br>Mali Niger<br>Source : Authors<br><!-- End of picture text --> The analysis of spending begins with measurement of the incidence of public spending on education, health, and targeted social programs. It also includes the effects of specific subsidies for electricity and liquefied petroleum gas (in Mali) and agricultural subsidies (in both countries). The social spending considered accounted for approximately 30 percent of total government expenditures in 2014 in Mali and 27 percent in Niger (Appendix B). The method for analyzing public expenditure generally comprises three stages. First, the value of the unit costs of the public expenditure or subsidy is estimated. Second, coverage of the spending or subsidies is identified and allocated to users or beneficiaries. Third, the results are aggregated and presented, showing the magnitude of public spending relative to household spending and income broken down according to quantile.

# **3. Distribution of Taxes and Transfers**

# _Direct Taxes: WST_

Direct taxes included in this analysis are the WST, a monthly tax on gross salaries of people employed in the formal sector. A person is working in the formal sector if he or she is entitled to annual paid leave, sick leave, or a retirement pension as an employment benefit. In Mali, wage earners who are employed by private and public organizations pay the WST, whereas in Niger, international organizations and family employees are exempted from the WST.

The richest individuals pay most of the direct taxes in both countries. The share of direct taxes increases with market income decile (figure 3.a). The richest individuals in Mali and Niger pay nearly all the direct taxes collected (figure 3.b). The richest decile pays more than 75 percent of total direct taxes in Mali and 95 percent in Niger, whereas the three bottom deciles pay less than 2 percent of total direct taxes (0.54 percent in Mali, 0.09 percent in Niger). These findings indicate 5
a high level of informality in the countries, because the poorest individuals are more likely to work in informal sectors, evading tax payment and leaving all the burden on the small number of the richest individuals, who are employed in formal sectors.

**Figure 3. Distributional Effects of Direct Taxes in Mali and Niger, 2014**

<!-- Start of picture text --> 3.a Direct taxes as a share (%) of market income per decile<br>6<br>5<br>4<br>3<br>2<br>1<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Mali Niger<br>3.b Share (%) of direct taxes paid by market income deciles<br>100<br>90<br>80<br>70<br>60<br>50<br>40<br>30<br>20<br>10<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Mali Niger<br>Source: Authors.<br><!-- End of picture text --> Direct taxes in Mali and Niger are much more progressive than in other countries (Figure C.1). This is related to the high level of informality of the two countries’ economies, with a large proportion of the population working in informal sectors and therefore not paying the WST while the small proportion working in formal sectors pay almost all the direct taxes. As mentioned in the preceding paragraph, the former are essentially the poorest individuals and the latter the richest ones.

6
# _Indirect Taxes: VATs, Import Taxes, and Other Consumption Taxes_

Indirect taxes on consumption of goods and services are considered through their effective rate derived from each country’s social accounting matrix (SAM). This allows informality to be corrected for when assessing the effect of the various indirect taxes. In reality, because of the high level of informality in developing economies such as Mali and Niger, the statutory rates of indirect taxes cannot provide an accurate estimate of the actual indirect taxes collected because tax evasion can be significant, but the effective rates from the SAM indicate the actual taxes collected, meaning that they correct for informality. In Mali, indirect taxes are estimated by analyzing price multipliers using the 2005 SAM, calibrated and updated based on 2012 macroeconomic indicators; in Niger, indirect taxes are estimated using the effective rates derived from the 2011 SAM.

The direct and indirect effects of the VAT are considered in this assessment. The effective rates applied to each product in the SAM represent the direct effect of VATs on consumers. In an economy with exempt sectors, VATs have indirect effects on prices through VATs paid on inputs. In general, the producers can claim VAT refunds for the inputs they used. The VAT is therefore levied only on the final product, but for sectors that are exempt from the VAT, no VAT is paid directly on final goods, although the VAT has an indirect effect. A VAT paid on inputs results in higher producer prices because producers cannot claim VAT refunds for the inputs they used to produce the final (exempted) goods. In this regard, the input-output matrix is used to determine the indirect effects of VATs in exempt sectors. The total effect of the VAT is equal to the sum of the direct and indirect effects.

Although the richest individuals in Mali and Niger pay the majority of indirect taxes, the poorest individuals pay a nonnegligible amount. The richest decile is the main contributor to indirect taxes in the two countries, paying more than 50 percent of all indirect taxes in Mali and approximately 30 percent in Niger (figure 4.b). Nonetheless, in contrast to direct taxes, the poorest individuals pay a significant amount of all indirect taxes. For instance, the poorest 30 percent pay more than 8 percent of all indirect taxes in Mali and more than 12 percent in Niger. Moreover, total indirect taxes paid is not negligible, especially with respect to the incomes of the poorest individuals. As a share of market income, all indirect taxes represent approximately 7 percent for the poorest deciles in Mali and 4 percent in Niger and approximately 10 percent for the richest decile in Mali and 5 percent in Niger (figure 4.a). In addition, indirect taxes are slightly progressive because they increase overall as a share of market income with increasing income decile.

7
**Figure 4. Distributional Effects of Indirect Taxes in Mali and Niger, 2014**

<!-- Start of picture text --> 4.a Indirect taxes as a share (%) of market income per decile<br>12<br>10<br>8<br>6<br>4<br>2<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Mali Niger<br>4.b Share (%) of indirect taxes paid by market income deciles<br>60<br>50<br>40<br>30<br>20<br>10<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Mali Niger<br>Source: Authors<br><!-- End of picture text -->

# _Direct Transfers_

Direct transfers include a cash transfer program in Mali and scholarships and school meal programs in Niger. The first is the _Jigisemejiri_ cash transfer program, of which the World Bank is the main funder. The aim of this program is to cover 75 percent of households below the poverty line by the end of the project, which targets poor and food-insecure households. In 2014, the program covered Bamako and Sikasso. The second is support of grant to university students meeting the criteria of the _Direction des Bourses et des Aides Financières_ (e.g., citizenship, submitting an application). The third is a meal program that covers primary and secondary students 8
mostly located in nomadic ( _cantines nomades_ ) and sedentary ( _cantines sédentaires_ ) regions, with the aim of improving school attendance and success rates.

In contrast to Mali, in Niger, the richest people benefit the most from direct transfers. In Mali, the poorest 40 percent receive nearly 85 percent of the total amount transferred to households, meaning that cash transfers are pro-poor. This is related to the design of the _Jigisemejiri_ cash transfer program, which explicitly targets people below the poverty line, as described earlier. In Niger, the richest 30 percent receive more than half of total direct transfers, mainly because less than 1 percent of the population in Niger was attending university in 2014, and 95 percent of them were in the top three deciles, and because school grants (scholarships) account for 70 percent of total direct transfers in the country. Direct transfers are clearly not pro-poor in Niger (figure 5.b).

**Figure 5. Distributional Effects of Direct Transfers in Mali and Niger, 2014**

<!-- Start of picture text --> 5.a Direct transfers a share (%) of market income per decile<br>0.18<br>0.16<br>0.14<br>0.12<br>0.1<br>0.08<br>0.06<br>0.04<br>0.02<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Mali Niger<br><!-- End of picture text --> 9
<!-- Start of picture text --> 5.b Share (%) of direct transfers received by market income deciles<br>45<br>40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Mali Niger<br><!-- End of picture text --> _Source:_ Authors The amount of total direct transfers is small, especially for the poorest people **.** Although direct transfers are pro-poor in Mali, their small size may limit their effect in improving the well-being of the population (figure 5.a). Direct transfers account for less than 1 percent of market income for each of the four bottom deciles. This is also true for Niger, where in addition to not being propoor, direct transfers are marginal.

# _Health and Education Expenditures_

Public expenditures on education and health are considered through their unit costs, which are imputed to every individual who uses public health and education services. Public spending on education includes salaries, operating expenses, and investments in physical infrastructure. The total number of individuals enrolled in primary, secondary, and higher education is estimated directly from the survey, and the unit costs of each level of education are obtained by dividing public spending on education by total national enrollment. Then, the amount of education spending to be transferred to each household is determined by multiplying the number of individuals in the household enrolled in primary, secondary, and tertiary education in 2013/14 by the respective unit costs. For health, the number of individuals who visited a public health care provider or were hospitalized during 2013/14 is estimated based on the survey. The unit cost is determined by dividing total health spending by the total number of individuals. This assumes more-equitable distribution among health service users than happens in reality; health service users do not receive the same levels of benefits depending on the nature of the service received, but it is not possible to distinguish health spending for different types of services in the budget data. The calculation of the unit costs of education and health is refined here by estimating specific unit costs according to region.

Health and education spending are globally progressive in Mali and Niger. In-kind transfers in health and education are overall progressive in the two countries (figure 6). Their progressivity is 10
higher in Niger than in Mali, meaning that health and education spending as a share of market income decreases more rapidly with increasing income deciles for Niger. In addition, education spending, especially for higher education, benefits mostly the richest individuals because they are more likely to attend university in developing economies in general.

**Figure 6. Distributional Effects of In-Kind Transfers in Mali and Niger, 2014**

<!-- Start of picture text --> 6.a In-kind transfers in health as a share (%) of market income per decile<br>5<br>4.5<br>4<br>3.5<br>3<br>2.5<br>2<br>1.5<br>1<br>0.5<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Mali Niger<br>6.b In-kind transfers in education as a share (%) of market income per decile<br>25<br>20<br>15<br>10<br>5<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Mali Niger<br><!-- End of picture text --> _<u>Source</u>_ <u>: Authors</u> _Incidence of Indirect Subsidies: Energy Subsidies and Agricultural Subsidies_ Indirect subsidies included in this analysis are energy subsidies (only in Mali) and agricultural subsidies. For the former, the survey data are used to estimate annual household consumption of gas and electricity. Then, the subsidy per kilogram of gas and per kilowatt-hour of electricity is estimated by dividing the total public subsidy in 2014 by total annual consumption of gas and electricity. The average price of gas and the electricity rate brackets are also used to determine 11
consumption levels. Consequently, the total value of the subsidy that the household receives is the product of the subsidy per kilogram or kilowatt-hour and annual household consumption. For agricultural subsidies, the survey data are used to identify the direct beneficiaries of the agricultural services that the government provides to farmers. Then, the per capita spending of the program is calculated by dividing total expenditures of the program by total beneficiaries. Accordingly, the per capita amount is imputed to each beneficiary to represent the value of agricultural subsidies they receive.

The poorest benefit the most from agricultural subsidies in Mali, whereas the richest benefit the most in Niger. The poorest 50 percent receive 58.3 percent of total agricultural subsidies in Mali and 30.7 percent in Niger (figure 7.b). Moreover, agricultural subsidies are progressive in Mali. For instance, as a share of market income, the total benefit of agricultural spending decreases as income level rises, whereas in Niger, there is no evidence of the progressivity of agricultural subsidies, and the share of total agricultural subsidies in market income fluctuates with income level (figure 7.a).

12
**Figure 7. Distributional Effects of Agricultural Subsidies in Mali and Niger, 2014**

<!-- Start of picture text --> 7.a Agricultural subsidies as a share (%) of market income per decile<br>4<br>3.5<br>3<br>2.5<br>2<br>1.5<br>1<br>0.5<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Mali Niger<br>7.b Share (%) of agricultural subsidies received by market income deciles<br>20<br>18<br>16<br>14<br>12<br>10<br>8<br>6<br>4<br>2<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Mali Niger<br>Source: Authors<br><!-- End of picture text --> The richest benefit the most from energy subsidies in Mali. Gas and electricity subsidies are globally regressive (figure 8), which the fact that domestic energy services are currently not affordable for the poorest partly explains. As a result, only the few better-off individuals with access to these services benefit from the subsidies. In the case of electricity, for example, only 27 percent of the population, who are overall nonpoor individuals, had access in 2014. This evidences bad targeting (at the poor) of energy subsidies. To really help the poorest individuals benefit from subsidies, the first step should be to provide access to gas and electricity services.

13
**Figure 8. Energy Subsidies As a Share (%) of Market Income Per Decile in Mali, 2014**

<!-- Start of picture text --> 0.7<br>0.6<br>0.5<br>0.4<br>0.3<br>0.2<br>0.1<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Gas subsidy Electricity subsidy<br>Source: Authors.<br><!-- End of picture text -->

# **4. Effect of Taxes and Public Spending on Poverty and Inequality**

Fiscal policy has a favorable but marginal effect on reduction of inequality in Mali and Niger. The effect of fiscal policy on inequality is similar in the two countries (figure 9). In Mali, taxes and public spending reduce the Gini index by 4.5 percent, or 0.02 Gini points, from market income to final income (figure 9). Without in-kind benefits (health and education), Mali’s fiscal policy achieves a redistributive effect of 0.01 Gini points, corresponding to a 2 percent drop. In Niger, taxes and public spending reduce the Gini index by 5.6 percent from market income to final income, corresponding to a 0.02 Gini point decrease from market income to final income. Excluding in-kind benefits, Niger’s fiscal policy leads to a redistributive effect of 0.01 Gini points.

14
**Figure 9. Effect of Fiscal Policy on Inequality in Mali and Niger, 2014**

<!-- Start of picture text --> 0.491 0.486 0.482<br>0.469<br>0.337 0.327 0.326 0.318<br>Mali Niger<br>Market Income Disposable Income Consumable income Final Income<br>Source: Authors<br><!-- End of picture text --> The redistributive effect of fiscal policy in Mali and Niger is lower than in other countries. In a set of 11 developing countries, the redistributive effects in Mali and Niger are below the average, with Niger having a better redistributive effect than Mali (Figure C.2). In the set of selected countries, only three (Bolivia, Indonesia, Zambia) perform worse than Mali. The other countries achieve a higher level of fiscal redistribution, with South Africa having the best fiscal redistribution.

The marginal contributions to inequality reduction of the various fiscal interventions show that (direct and indirect) taxes and basic education (primary education for Niger) are the most redistributive interventions in Mali and Niger. Direct transfers achieve a low level of redistribution in Mali given that they account for a small share of total spending, and they increase inequality in Niger given that they mostly benefit the richest, as explained earlier (Figure C.3). In addition, agricultural subsidies reduce inequality, although they have a low redistributive effect, especially in Niger. In contrast, energy subsidies (gas and electricity) increase inequality in Mali. The country’s fiscal policy would have had a greater redistributive effect without energy subsidies. Education and health spending also reduce inequality, with the exception of spending on higher education, because most of the individuals receiving higher education are from the richest deciles in developing countries in general.

Fiscal policy increases impoverishment in Mali and Niger **.** For instance, the poverty rate (measured using the national poverty line) rises by 5.9 percent (2.4 percentage points) in Mali and 5.5 percent (2.5 percentage points) in Niger from market income to consumable income because of the impoverishing effect of indirect taxes (figure 10). The trend of poverty variation observed is similar to that of other African countries. From market income to disposable income, poverty rates decrease as a result of the combined effect of direct transfers and taxes, but when indirect taxes 15
and subsidies are considered, the poverty rate for the corresponding income concept (consumable income) increases, leading to a global poverty increase for the fiscal system.

**Figure 10. Effect of Fiscal Policy on Poverty in Mali and Niger, 2014**

<!-- Start of picture text --> 47.02<br>44.54 44.46<br>42.99<br>40.59 40.42<br>Mali Niger<br>Market Income Disposable Income Consumable income<br>Source: Authors.<br><!-- End of picture text --> Direct taxes (−0.01 in Mali and Niger) and transfers (0.02 in Mali, 0 in Niger) have little effect on poverty because the richest households pay most of the direct taxes, and direct transfers are relatively small. In addition, in Niger, direct transfers are not well targeted at the poor. In contrast, **− −** indirect taxes have a strong impoverishment effect ( 3.66 in Mali, 2.44 in Niger) that is, in absolute value, greater than the poverty reduction effect (0.79 in Mali, 0.02 in Niger) of indirect subsidies (Figure C.4). Of indirect tax categories, VATs have the strongest impoverishment effect **− −** ( 1.79 in Mali, 0.94 in Niger). As a result, poverty headcount measured according to consumable income is far above poverty headcount measured according to market income, confirming that fiscal policy is impoverishing in Mali and Niger.

Calculation of the poverty indexes before and after application of the fiscal policy shows that the increase in poverty is due to taxation in the two countries, but it does not show the proportion of households that have become poorer or richer because of the various fiscal interventions. Although payment of taxes impoverishes households, the benefits from public spending enrich them, and the net effect may therefore be positive (enrichment) or negative (impoverishment). The indicators that Lustig and Higgins (2016) propose are used to assess fiscal impoverishment of and fiscal gains to poor people. Fiscal policy is considered to have impoverished individuals if they were not poor before the policy was applied and became poor after its application or if they were already poor and dropped further below the poverty line after the policy’s application.

16
**Figure 11. Fiscal Impoverishment and Fiscal Gains in Mali and Niger, 2014**

<!-- Start of picture text --> Mal i Niger<br>37.89 45.94<br>31.98<br>21.46<br>20.93<br>13.13<br>5.51<br>0.25 1.7 0.43 2.68 1.08<br>From Market From Market From Market From Market From Market From Market<br>Income to Income to Income to Final Income to Income to Income to Final<br>Disposable Income Consumable Income Disposable Consumable Income<br>Income Income Income<br>Fiscal Impoverishment Fiscal Gains Fiscal Impoverishment Fiscal Gains<br>Source: Authors<br><!-- End of picture text --> Direct taxes have a relatively neutral effect on fiscal impoverishment. When moving from market income to disposable income and thus considering direct transfers net of direct taxes, almost no one becomes poor or is fiscally impoverished in the two countries. This is because direct transfers are targeted solely at the poor (for Mali), and only the richest members of the population pay direct taxes. Alternatively, when indirect taxes net of indirect subsidies are considered, 37.9 percent of the population is fiscally impoverished in Mali and 45.9 percent in Niger (figure 11). Hence, indirect taxes have a strong impoverishing effect. People pay more in indirect taxes than they receive in indirect subsidies.

The benefits of in-kind transfers in education and health somewhat attenuate the strong impoverishment effect of indirect taxes. Education and health spending greatly decrease fiscal impoverishment; from 37.9 percent at consumable income, fiscal impoverishment drops to 21.5 percent at final income in Mali and from 45.9 percent to 13.1 percent in Niger.<sup>4</sup> Moreover, with a small proportion of fiscal gainers at consumable income, fiscal gains rise significantly because of in-kind transfers.

# **5. Conclusion**

This paper aimed to assess the effect of spending and taxes on poverty and income distribution in Mali and Niger. We analyzed the incidence of two-thirds of total tax revenue, including the WST, VAT, import taxes, and other indirect taxes. We also analyzed the effect of spending on education

> 4 In most cases, spending on education and health is not included when assessing fiscal impoverishment and gains.

17
and health and of transfers and indirect subsidies that represent more than one-fourth of general government expenditures.

The results show that the fiscal system is progressive in Mali and Niger, but that fiscal policy has a limited effect on distribution of revenue and a negative effect on poverty. The fiscal system reduces the Gini index by only 4.5 percent in Mali and 5.6 percent in Niger and results in a 5.9 percent higher poverty rate in Mali and a 5.5 percent higher rate in Niger. The low redistributive effect of fiscal policy in the two countries is mainly because of poor targeting of energy subsidies (in Mali) and the small size of direct transfers (in both countries). The redistributive effect is more limited in Mali and Niger than in South Africa (0.077) and Tunisia (0.044). Results for 11 countries in Latin America show a redistributive effect ranging from 0.02 to 0.14 (Lustig 2015).

The various indirect taxes have a strong impoverishing effect despite reducing inequality. It will be important to reform indirect taxes by lowering tax rates on the products that poor people consume most. Indirect subsidies should also be better targeted to mitigate the impoverishing effect of indirect taxes. The fiscal system could deliver more benefits to individuals who the tax system impoverishes, by transferring more resources (higher levels and broader coverage) through the cash transfer program.

18