The Effects of Taxes and Transfers on Inequality and Poverty in Pakistan

This study assesses the impact of fiscal policy in Pakistan - taxes, social expenditures, and subsidy expenditures - on poverty and inequality using the Commitment to Equity (CEQ) Methodology. Results show that fiscal policy increased the national poverty headcount and left inequality largely unchanged during fiscal year 2019 (spanning July 1, 2018, to June 30, 2019). The net effect of the fiscal system is to increase the poverty headcount ratio at the national poverty line by approximately two percentage points. Overall, the combination of direct and indirect taxes paid, cash or near-cash transfers received, and subsidy benefits captured leaves most households as net payers into the fiscal system; only the poorest decile are net recipients in cash terms from the fiscal system. Taxes, transfers, and subsidies have a muted impact on inequality: the Gini coefficient index falls from 29.0 to 28.6 from pre-fiscal to post-fiscal income. The most effective expenditure-side instrument for either poverty or inequality reduction is the BISP social protection program; the revenue-side instruments that shield poor and vulnerable households most effectively are the personal income tax and the urban property tax. The revenue-side instrument most effective at reducing inequality is the personal income tax. Indirect taxes and subsidy expenditures - which are far larger in fiscal magnitude than direct taxes or social transfers (respectively) in Pakistan in fiscal year 2019 - are not particularly effective at reducing poverty or inequality. In-kind transfers of public health and education services also have an insignificant impact on inequality