Fiscal Incidence and Inequality1
This paper evaluates the impact of redistributive fiscal policies in Benin by estimating their incidence on household-level income inequality and poverty rates. The value of taxes (both direct and indirect) paid by lower-income households and incorporated into the analysis exceeds the value of benefits created by social expenditures incorporated into the analysis. The analysis concludes that targeting spending to lower-income households is key to achieve social objectives.2
A. Poverty in Benin
1. Solid macroeconomic performance did not translate in a meaningful reduction in poverty in Benin. Following a decade of mediocre economic performance, growth over the last 3 years (2013–15) averaged 5.2 percent, closing the gap with the sub-Saharan Africa (SSA) average in per capita GDP growth (Box 1). However, growth remains non-inclusive, thereby calling for a better strategy to improve the living standards of the poorest sectors over the medium term (Figure 1).
Figure 1.Benin: Elusive Inclusiveness, 1990-16
Sources: Beninese authorities and IMF staff calculations.
2. Poverty indicators deteriorated in recent years. Despite the increase in real GDP per capita since 1987, the poverty rate in the country deteriorated in recent years (Figure 1). An overall estimate of poverty in Benin conducted by the National Institute of Statistics and Economic Analysis (INSAE) shows that poverty indicators deteriorated from 36.2 percent of population in 2011 to 40.1 percent in 2015. The result is mainly explained by the contraction of consumer spending. The survey conducted by the INSAE also found:
- Women experienced higher levels of (non-monetary) poverty than men. However, regarding monetary poverty, the analysis found that groups led by women are better off than those led by men (women heads of households generally enjoy sufficient economic autonomy, resulting in part from their marital status, household size and sectors of activity, and by the fact that women are benefiting from better access to credit).
- Individuals living in households headed by persons with at least primary education are less affected by monetary or non-monetary poverty.
3. Benin ranked 167 out of 185 against 166 in 2015 in human development. At the regional level, Benin ranked 35th against 31st in 2015. However, Benin’s level of development has remained virtually unchanged, as its Human Development Index has risen from 0.480 in 2015 to 0.485 in 2016 below the average of 0.497 for countries in the low human development group and below the average of 0.523 for countries in sub-Saharan Africa (SSA).
4. Poverty in Benin is underpinned by poor governance indicators. In 2015, Benin is placed 16th (out of 54) in overall governance, registering only a marginal progress over the decade (+0.7). The country’s high scores in Participation & Human Rights and Safety & Rule of Law, in which Benin achieves respectively the 9th and 11th ranks, are offset by weaker performance in Human Development and Sustainable Economic Opportunity, in which Benin features in the bottom half of the continental rankings, at 31st and 28th respectively.
- Moreover, Benin has deteriorated in Safety & Rule of Law over the decade (−1.9), driven by decline in National Security (−7.9) with Cross- border Tensions and Government Involvement in Armed Conflict featuring among the country’s ten most deteriorated indicators over the decade. Benin also registers a decline, albeit marginal, in Personal Safety (−1.0), showing considerable deterioration in the indicators Safety of the Person and Social Unrest, while Police Services registers the second largest improvement on the continent.
- Benin receives its highest category score in Participation & Human Rights (68.6), but shows no change in performance over the decade. In fact, the country registers considerable decline in Rights (−9.3), being the seventh most deteriorated country on the continent. Human Rights Violations features among Benin’s ten most deteriorated indicators over the decade, with concerning regression also registered in Freedom of Expression and Freedom of Association & Assembly.
- Benin’s very minimal progression in Sustainable Economic Opportunity (+0.1) is driven entirely by Infrastructure (+5.6), although it remains a relatively low ranking country in this sub-category (37th). The country registers decline in all three other sub-categories – Public Management, Business Environment and Rural Sector – and five of Benin’s ten most deteriorated indicators over the decade sit in this category.
- Improvement in Human Development (+4.5) is driven by progress across all three sub-categories, although this remains its lowest ranking category (31st). Benin is the eighth most improved country in Education (+10.6) on the continent, with Education Quality and Primary School Completion featuring among the country’s ten most improved indicators over the decade.
5. Evaluating the redistributive impact of fiscal policies requires a comparison of incomes and expenditures with and without the benefits or burdens created by fiscal policy. The assessment here incorporates most of the social spending portfolio (e.g., education and healthcare) in Benin; spending on defense, security, and infrastructure, is excluded. The assessment analyzes the redistributive impact of fiscal policies at a point in time and remains silent on the dynamic effects of these policies on income inequality.
6. On the government revenue side, only VAT and grants are included in the analysis whereas corporate income tax, corporate withholding tax, customs duties, and nontax revenue are excluded (Text Table below).
|Tax on international trade||7.6||7.0||6.0||6.2|
|Direct and indirect taxes||6.9||7.5||7.4||7.3|
|Non tax revenues||2.3||2.2||2.0||1.9|
C. Methodological Summary and Household Survey Data
7. A Commitment to Equity (CEQ) assessment was carried out to assess the redistributive impact of fiscal policies in Benin. Typically, a CEQ assessment considers specific fiscal policy elements, (i.e., programs, expenditures, or revenue collections) and allocates them to individuals and households from a micro-level socio-economic survey. Once the allocations are made, CEQ calculates different measures of poverty and impoverishment, inequality and progressiveness, as well as the extent of income redistribution. The effect of redistributive fiscal policy on incomes is based on the comparison of two so-called “income concepts” excluding (i.e., pre-fiscal) and including (i.e., post-fiscal) fiscal policy measures. The construction of these income concepts is presented in Figure 2.
Figure 2.CEQ Income Concepts
Source: Excerpted from Lustig (2016)
8. Assessments of impact on inequality and poverty. The change in the measures of inequality (e.g., Gini coefficient) and poverty (head count) between the pre- and post-fiscal distributions give the magnitude of the impact. For example, the extent to which the system reduces inequality is derived by tracing how inequality evolves as different transfers and taxes are added or subtracted from income. Similarly, the impact on poverty is obtained by tracing the change in poverty across income concepts. Two key concepts are used to describe how progressive or regressive interventions are: “concentration shares”, which are the benefits received by households (ranked by per-capita income) measured as a share of total benefits created (via government expenditures); and “incidence”, or the benefits received by income-ranked-households measured as a proportion of own income.
9. Fiscal policy has had a redistributive effect in Benin. Our findings suggest that while VAT reduces inequality, it also contributes to an increase in the poverty headcount rate. The Gini coefficient for disposable income (0.43) is one Gini point higher than the coefficient for final incomes, i.e., disposable income minus indirect taxes plus in-kind benefits created by the public health and education systems (Figure 3). While inequality is marginally higher in urban areas compared to rural ones, fiscal policy is equally effective in both (Figure 3).
Figure 3.Benin: Gini Coefficient and Poverty Headcount
10. Health and education spending reduce poverty. The impact on inequality and poverty is approximately the same in urban and rural areas. Poverty rates increase when a combination of indirect taxes and subsidies are considered. Subtracting the indirect taxes that households paid (e.g., through general consumption expenditure) from their disposable incomes increases the share of the population living under the poverty line from 40 percent to 43 percent (see the Poverty Headcount figures for Consumable Income in Figure 3). While poverty in rural areas is higher to begin with, standing at nearly 43 percent of the rural population, the adverse effect from tax and spending tools combined is more muted in these areas (Figure 3).
11. The progressivity of overall education is driven by primary education while tertiary education is regressive. The progressiveness of all education benefits together in Benin is driven by primary school spending, with most public-school students benefiting from it. However, shares of junior secondary, senior secondary and especially tertiary public school benefits increase with income (Figure 4).
Figure 4.Benin: Concentration Shares in Education and Health
12. Public education and healthcare spending have a larger redistributive effect on lower-income households than subsidies. Social spending benefits (i.e., public education and healthcare) account for a large share of poorer households’ incomes.
- For instance, health and educational benefits (transfers) contribute, approximately, by four percent of individual income. The Lorenz curve below shows income/consumption expenditures (in red) and the concentration curves for total in-kind benefits received (health, education) as well as total VAT paid.
- Greater shares of benefits from the public health and education system are captured by richer individuals in Benin, but those benefit shares are still less than shares of pre-benefit income: the concentration curve for benefits lies below the 45° line, but above the Lorenz curve for income/consumption.
Value Added Taxation
13. Upper-income households pay larger shares of total VAT collections in Benin. VAT is equalizing as the VAT burden, measured as a share of pre-VAT income in households, rises with income. VAT is progressively distributed in that richer households are responsible for VAT shares that are greater than their pre-VAT income shares: the concentration curve for VAT lies below the Lorenz curve for Income/Consumption. However, any tax represents a reduction in households’ purchasing power of all goods and services available.
14. Below is the Lorenz curve for Income/Consumption expenditures (in purple) and the concentration curves for in-kind benefits received at health and education providers.
- the most progressively distributed in-kind benefit is primary education, shares of which are larger for poorer households than for richer households – i.e. the concentration curve for primary education lies above the 45° line.
- education benefits from the junior secondary level are approximately neutrally or proportionally distributed: shares of benefits are approximately the same regardless of position in the income distribution.
- larger shares of senior secondary education and benefits from health are captured by richer households—the concentration curves for senior secondary education and health lie below the 45° line but above the Lorenz curve for income/consumption.
15. Tertiary education is the only benefit that is regressively distributed in that shares of tertiary education benefits are rising with income.
E. Conclusion and Policy Implications
16. Fiscal policy in Benin has partially contributed to the reduction of inequality. The incidence of value added taxes is progressive as wealthier households shows higher total payments. Although education and health expenditures are targeting lower-income households, fiscal policies in Benin increase poverty as more households are suffering the incidence of taxation without being adequately compensated with targeted subsidization programs or direct transfers.
17. A policy implication from this study calls for considering targeting public spending to compensate lower-income households. Given that a higher portion of their income is subject to taxation, VAT falls relatively heavier on lower-income households—despite its overall progressivity. Nonetheless, inequality is reduced by indirect taxes and in-kind benefits of health and education. While inequality is marginally higher in urban areas compared to rural ones, fiscal policy is equally effective in both. This finding calls for effectively targeting social spending within the authorities’ medium-term strategies for poverty reduction and development.
Institut National de la Statistique et de l’Analyse Economique2015Enquête Modulaire Intégrée sur les Conditions de Vie des Ménages. Octobre.
NoraLustig ed. Commitment to Equity Handbook: Estimating the Redistributive Impact of Fiscal PolicyThe Brookings Institution and CEQ Institute/Tulane University in progress.
Human Development Report2016UNDP2016.
Prepared by Benin team in close collaboration with Jon Jellema, Maya Goldman (both at CEQ). This analysis was undertaken as part of a joint project between Commitment to Equity (CEQ) and IMF staff, as well as with the Organization for Economic Cooperation and Development (OECD) in the context of the EU Social Protection Systems Programme, which is co-funded by the European Union, the OECD and the government of Finland. However, the contents can in no way be taken to reflect the views of the European Union or the government of Finland.
Due to data availability, the analysis has excluded certain elements of the expenditure and revenue portfolios, so the analysis is not comprehensive but partial.