Poverty and Shared Prosperity in Russia: Non-market income and the incidence of the fiscal
system
Team: Luis F. Lopez-Calva (World Bank), Nora Lustig (Tulane University), Mikhail Matytsin (World Bank),
Daria Popova (Higher School of Economics).
The ‘Poverty and Shared Prosperity in Russia’ project is undertaking work to assess how market (labor) and nonmarket income (net fiscal incidence) explain the capacity of the bottom 40 to contribute to economic growth in
the country.
This report describes the work to be undertaken to support the second component of analysis. This entails
analyzing non-market income and the incidence of the current fiscal system on the basis of the Commitment to
Equity (CEQ) Framework.1 Applying the CEQ framework, the study will analyze the impact of taxation and
public spending on inequality and poverty, the incidence of (direct and indirect) taxes and benefits, and the equity
of access to services (in particular, education and health; and, urban infrastructure) in Russia.
In order to fully understand the dynamics of bottom 40 income, it is important to delve into the incidence of the
fiscal system, including taxes and transfers. As discussed in Bussolo and Lopez-Calva (2014), the relevance of
transfers in ECA has to be analyzed from the perspective of both the implicit incentive structure the system
establishes to induce different levels of labor force participation and productive engagement, as well as from the
point of view of potential risks to sustainability given the level of transfers and demographic structure.
On the expenditure side, while market income plays a very substantial role among all income groups in Russia,
the contribution of public transfers, both pensions and safety net programs to total income is much higher for
the poor and vulnerable, than for the rest (Meyer and Sanchez-Paramo, 2014).
On the other hand, it has been anticipated that Russia will need to implement important fiscal adjustment over
the coming years. Bogetic et al (2010) reviewed Russia’s fiscal position following the 2008-09 global financial
crisis finding that, while the country’s solid pre-crisis fundamentals (in terms of fiscal position, public debt, and
reserves) helped buffer the shocks, Russia needs to implement revenue and expenditure measures over the next
years to guarantee sustainability.
The methodology and diagnostic framework have been developed as part of the Commitment to Equity (CEQ) project—a
joint initiative of the Inter-American Dialogue and Tulane University— used to assess the taxation and public spending
systems of twelve countries in Latin America, and currently being expanded to other regions of the world. The standardized
methodology allows one not only to assess the equity, efficiency, and effectiveness of revenue collection and public spending
patterns in a particular country, but also to compare the performance of various countries. (For more information, visit
www.commitmentoequity.org.)
1
To shed light on these issues, the second component of this project will analyze non-market income and the
incidence of the current fiscal system on the basis of the Commitment to Equity (CEQ) Framework. 2 Applying
the CEQ framework, the study will analyze the impact of taxation and public spending on inequality and poverty,
the incidence of (direct and indirect) taxes and benefits, and the equity of access to services (in particular,
education and health; and, urban infrastructure) in Russia.
The CEQ Framework’s standardized method of tax and benefit incidence analysis and a comprehensive
diagnostic set of questions will be used to assess the equity, efficiency, and effectiveness of revenue collection and
public spending patterns in Russia. This will help answer the question of who bears the burden of taxation and
who receives the benefits of public spending, and of how these burdens and benefits are distributed across
socioeconomic groups, with emphasis on the bottom 40 group.
The Incidence Analysis. It is important to point out from the outset that the methodology proposed relies on
standard incidence analysis without behavioral, lifecycle or general equilibrium effects. In addition, the focus will
be on average incidence rather than incidence at the margin. Finally, the analysis will exclude some important
taxes/other revenues (corporate and international trade taxes, for example) and spending categories
(infrastructure investments including urban services and rural roads that benefit the poor and the bottom 40, for
example) that surely affect income distribution and poverty, but where methodologies are still to be fully
developed.
Great care must be placed in defining income concepts and specifying the method followed to estimate the
incidence of every tax and benefit category. Based on Lustig and Higgins (2013), for each household in a
household income and expenditure survey the method estimates market income and compares this measure of
income with that of net market, disposable, post fiscal and final income. These measures generate different
distributions from which one can estimate headcount poverty rates and other statistics that can be compared.
This enables us to judge, at each stage, how equitably distributed household income is compared to a situation
where there is no public interference.
Defining Progressive and Regressive Tax and Spending Policies. To determine if a tax or transfer is progressive,
concentration curves, concentration coefficients and the Kakwani (1977) index are used. Concentration curves
are constructed similarly to Lorenz curves with the difference that the vertical axis measures the proportion of
the tax (transfer) under analysis paid (received) by each quantile. Therefore, concentration curves for a transfer
targeted to the poor, for example, can be above the diagonal; something which, by definition, could never happen
with a Lorenz curve. Concentration coefficients are calculated in the same manner as the Gini; although it is
worth noting that, in the cases in which the concentration coefficient is above the diagonal, the difference
The methodology and diagnostic framework have been developed as part of the Commitment to Equity (CEQ) project—a
joint initiative of the Inter-American Dialogue and Tulane University— used to assess the taxation and public spending
systems of twelve countries in Latin America, and currently being expanded to other regions of the world. The standardized
methodology allows one not only to assess the equity, efficiency, and effectiveness of revenue collection and public spending
patterns in a particular country, but also to compare the performance of various countries. (For more information, visit
www.commitmentoequity.org.)
2
between the triangle of perfect equality and the area under the curve is negative, which cannot occur with the
Gini for the income distribution by definition. The data used to generate concentration curves and coefficients is
derived from incidence analyses.
Information on direct and indirect taxes, transfers (in cash and in kind) and subsidies, however, cannot always be
obtained directly from the available household survey. When the data is readily obtained, we call this the Direct
Identification Method. When the direct method is not feasible, we will use inference, simulation or imputation
methods. These methods are detailed, on the basis of the Commitment to Equity (CEQ) Framework in Lustig
and Higgins (2013).
The information and results will allow policymakers and stakeholders to learn about whether the current fiscal
structure reinforces or offsets the patterns determined in the markets. This, along with the analysis of the labor
income dynamics, will allow us to establish lessons and potential areas of intervention.
Bogetic, Zeljko, Karlis Smits, Nina Budina and Sweder van Wijnbergen. 2010. "Long-term fiscal risks and
sustainability in an oil-rich country : the case of Russia." Policy Research Working Paper Series 5240, The World
Bank.
Bussolo, Maurizio and Luis F. Lopez-Calva. 2014. “Shared Prosperity: Paving the Way in Europe and Central
Asia.” The World Bank.
Kakwani, N.C. 1977. “Measurement of tax progressivity: an international comparison.” The Economic Journal 87,
71-80.
Lustig, Nora, and Sean Higgins. 2013. Commitment to Equity Assessment (CEQ): Estimating the Incidence of
Social Spending, Subsidies and Taxes. Handbook, CEQ Working Paper No. 1, July 2011; revised September
2013. New Orleans, LA.
Meyer, Moritz, and Carolina Sánchez-Páramo. 2014. “Economic Mobility and the Emergence of the Middle Class
in Russia.” mimeograph, The World Bank Group.