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The Incidence of Taxes and Spending in Sri Lanka

Nisha Arunatilake, Gabriela Inchauste () and Nora Lustig ()
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Nisha Arunatilake: Institute of Policy Studies of Sri Lanka

No 63, Commitment to Equity (CEQ) Working Paper Series from Tulane University, Department of Economics

Abstract: Sri Lanka has made substantial progress in reducing poverty over the past decade. However, important social and economic development needs persist at a time when revenue collections have been disappointing, reducing the government’s ability to expand spending. In this context, this paper has sought to evaluate the effectiveness of fiscal policy in addressing inequality and accelerating poverty reduction. The exercise consisted of undertaking incidence analysis of the major tax and transfer programs individually, and then combining them to evaluate the incidence of fiscal policy as a whole. Although we could not carry out incidence analysis of all budget items, we have analyzed the major tax and spending items for which individual tax and benefits can be assigned to households using microdata. The analysis finds that taxes and social spending were redistributive and poverty-reducing overall. However, given the country’s relatively low revenue and the limited fiscal space, overall social spending was small, leading to very limited impacts. On the spending side, direct transfers are absolutely progressive, so that their marginal contribution is both equalizing and poverty-reducing. In contrast, spending on indirect subsidies increased with a large part of the resources benefiting nonpoor households. Finally, the analysis found that in kind transfers in the form of education and health are equalizing. Going forward, any efforts to reform taxes could usefully include distributional analysis to assess their impact.

Keywords: fiscal policy; fiscal incidence; social spending; inequality; poverty; taxes; Sri Lanka (search for similar items in EconPapers)
JEL-codes: H22 I38 D31 (search for similar items in EconPapers)
Date: 2017-05
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Published in Commitment to Equity, May 2017, pages 1-33

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http://repec.tulane.edu/RePEc/ceq/ceq63.pdf First version, 2017 (application/pdf)

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