The Distributional Impact of Taxes and Social Spending in Bhutan : An Application withLimited Income Data

This paper analyzes the distributional impact of the tax-benefit system in Bhutan.It makes two main contributions: first, this is the first substantive study of this kind in Bhutan, and second, due tolimited information on incomes in the household survey, a consumption-based model is combined with Mincer-typeearnings to derive estimates of incomes. The results show that the combined impact of government taxes and socialspending is to reduce inequality and slightly increase poverty as of 2017. The increase in poverty is mainly due tothe burden of indirect taxes and social contributions that are not offset by other transfers. Households in the bottom80 percent are net receivers of fiscal interventions, with fiscal benefits primarily occurring through education andhealth benefits, which are both progressive. Most households did not pay much into the system as of 2017, as personalincome taxes have a high exemption threshold and sales taxes only apply to a selected number of goods that are mainlyconsumed by richer households. Due to the lack of direct transfers, the net cash position is negative for poorhouseholds, although the magnitude is very small. Simulations suggest that the recent personal income taxreduction leads direct taxes to be slightly more progressive; however, the inequality-reducing impact isdampened. The goods and services tax is expected to increase indirect taxes for households across the distribution and isless progressive than the sales tax. This could lead to a temporary increase in poverty, which could be offset throughdirect transfers financed by the additional revenues.