Fiscal Policy, Income Redistribution, and Poverty Reduction: Evidence from Tunisia

Abstract

This paper estimates the impact of Tunisia's tax and transfer system on inequality and poverty and assesses the benefits from public spending on education and health. Results show that Tunisia's redistributive fiscal policy reduces inequality and extreme poverty significantly. However, based on the national poverty line, the headcount ratio increases, implying that a large number of the poor people pay more in taxes than they receive in cash transfers and subsidies. This is due to a relatively high burden of personal income taxes and social security contributions for low-income households. JEL Codes: D31, H22, I38in Tunisia reduced inequality and extreme poverty, but a substantial portion of the moderately poor and vulnerable population paid more in taxes (direct and indirect) than they received in cash transfers and consumption subsidies. Although one needs to be very cautious in attributing causality, the high burden of personal income and payroll taxes at relatively low levels of income may have contributed to the discontent.This paper estimates the impact on poverty and inequality of Tunisia's safety net system and the taxes used to fund them 2 . It also analyzes who benefits from public spending on education, health, and student housing. Using the National Survey of Consumption and Household Living Standards for 2010, the most recent survey data available, we apply standard fiscal incidence analysis, as described in Lustig and Higgins (2013) and in Lustig (forthcoming, Chapters 1, 5, and 7). 3 Because this methodological framework has been applied to other middle-income countries under the Commitment to Equity (CEQ) project 4 , the results for Tunisia can be compared with those of other countries. 5 This paper, analyzes fiscal incidence based on what people actually paid and received, without assessing the behavioral responses that taxes and public spending may trigger from individuals or households. This method, often referred to as the "accounting" approach, starts from a pre-fiscal income concept-henceforth, called market income-and allocates the proper amount of taxes and transfers to each household or individual. 6 The incidence analysis used here is point-in-time, rather than lifecycle and does not incorporate behavioral or general equilibrium effects. That is, we do not claim that the pre-fiscal income obtained in this exercise equals the true counterfactual income in the absence of taxes and transfers. It is a first-order approximation. But even though the fiscal incidence analysis ignores second-round and general equilibrium effects, it is not a simple assessment of the statutory incidence. In particular, the incidence of taxes is analyzed by their (assumed) economic incidence rather than their statutory incidence. For instance, the analysis assumes that personal income taxes and contributions (by employee and by employer) are borne by labor in the formal sector.As indicated by Younger (chap 16, forthcoming CEQ Handbook 2017), the first-order approximation captures the largest share of the compen...

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