Fiscal Policy, Poverty, and Inequality in a Constrained Environment
This report analyzes the distributional impacts of the main taxes and transfers on households’ welfare in the West Bank and Gaza. The analysis uses the Commitment to Equity methodology, enabling comparison of the results to other countries where this framework has been applied. The report assesses the effects of government taxation, social expenditure, and indirect subsidies on poverty and inequality in the West Bank and Gaza. The results indicate that the combination of taxes and transfers modelled in the West Bank and Gaza reduces inequality by 6.5 Gini points but increases the national poverty headcount by 8.4 percentage points. These fiscal policy outcomes on poverty and inequality reduction are below average in terms of desirability compared to other lower-middle-income countries. The taxes and transfers modelled in the West Bank and Gaza achieve most inequality reduction through in-kind benefits from public basic education and public hospitals, followed by the Cash Transfer Program and the value-added tax (VAT). Their large impact on inequality reduction is explained by a combination of their progressivity and their size relative to household income. The redistributive effect of direct taxes, customs duties, and indirect subsidies is zero or close to zero. Indirect taxes represent the fiscal interventions contributing most to the increase in national poverty; customs duties followed by VAT represent the largest burden on households’ incomes. Direct transfers from social protection cannot offset the impoverishment effect from indirect taxes because they have very limited coverage. Only the poorest decile is a net cash beneficiary after paying taxes and receiving cashable transfers. The rest of the deciles are net payers to the fiscal system. To decrease poverty and inequality in the West Bank and Gaza, the most significant policy recommendation to emerge from the analysis is to expand direct transfers to the second and third deciles to compensate for indirect tax burdens. Financing this reform is feasible through domestic tax mobilization or through rationalization of inefficient fuel and electricity subsidies that benefit the top income deciles most.
| Main Authors: | , , , |
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| Language: | English |
| Published: |
Washington, DC: World Bank
2024-01-30
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| Subjects: | COMPARATIVE ANALYSIS, VAT, CASH TRANSFER PROGRAM, FISCAL POLICY, TAX ADMINISTRATION, INDIRECT TAXES, INEQUALITY REDUCTION, COMMITMENT TO EQUITY, |
| Online Access: | http://documents.worldbank.org/curated/en/099646401302432923/IDU11fba1aab1fb111482e1a1441122a743dfde3 https://openknowledge.worldbank.org/handle/10986/40991 |
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| Summary: | This report analyzes the
distributional impacts of the main taxes and transfers on
households’ welfare in the West Bank and Gaza. The analysis
uses the Commitment to Equity methodology, enabling
comparison of the results to other countries where this
framework has been applied. The report assesses the effects
of government taxation, social expenditure, and indirect
subsidies on poverty and inequality in the West Bank and
Gaza. The results indicate that the combination of taxes and
transfers modelled in the West Bank and Gaza reduces
inequality by 6.5 Gini points but increases the national
poverty headcount by 8.4 percentage points. These fiscal
policy outcomes on poverty and inequality reduction are
below average in terms of desirability compared to other
lower-middle-income countries. The taxes and transfers
modelled in the West Bank and Gaza achieve most inequality
reduction through in-kind benefits from public basic
education and public hospitals, followed by the Cash
Transfer Program and the value-added tax (VAT). Their large
impact on inequality reduction is explained by a combination
of their progressivity and their size relative to household
income. The redistributive effect of direct taxes, customs
duties, and indirect subsidies is zero or close to zero.
Indirect taxes represent the fiscal interventions
contributing most to the increase in national poverty;
customs duties followed by VAT represent the largest burden
on households’ incomes. Direct transfers from social
protection cannot offset the impoverishment effect from
indirect taxes because they have very limited coverage. Only
the poorest decile is a net cash beneficiary after paying
taxes and receiving cashable transfers. The rest of the
deciles are net payers to the fiscal system. To decrease
poverty and inequality in the West Bank and Gaza, the most
significant policy recommendation to emerge from the
analysis is to expand direct transfers to the second and
third deciles to compensate for indirect tax burdens.
Financing this reform is feasible through domestic tax
mobilization or through rationalization of inefficient fuel
and electricity subsidies that benefit the top income
deciles most. |
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