International Business & Management
The Distributional Impact of Taxes and Transfers: Evidence from Eight Low-and Middle-Income Countries
Jordan’s economy grew at an average of 6.7 percent a year between 2000 and 2008. This performance was better than the average of the Middle East and North Africa region as a whole, which grew at a rate of about 4.5 percent a year (World Bank 2012b). Jordan’s economic growth declined sharply between 2008 and 2009, coinciding with the global financial crisis: real gross domestic product (GDP) growth fell from almost 7.2 percent in 2008 to 2.3 percent in 2010 (IMF 2012).
With strong economic growth in the earlier part of the decade, the country made important social gains. For example, Jordan’s growth was accompanied by a large reduction in poverty (DOS and World Bank 2009; Mansour 2012). Even with the decline in per capita output growth in 2009 and 2010, the poverty rate had fallen by an estimated 5 percentage points between 2008 and 2010 (World Bank 2012a), and unemployment remained stable during this period (Inchauste, Mansur, and Serajuddin 2017).
Despite the progress in poverty reduction, the downturn in Jordan’s economy starting at the end of 2008 placed its fiscal accounts under pressure as both tax revenues and external grants fell (Inchauste, Mansur, and Serajuddin 2017). This downturn necessitated efforts to streamline government spending and institute reforms. At the same time, popular perceptions regarding Jordan’s progress in poverty reduction over this period remained typically pessimistic (DOS and World Bank 2009; Mansour 2012), making reform efforts challenging. Moreover, the regional wave of civil uprisings in 2011 that became known as the Arab Spring placed even stronger demands on the government for populist policies.
In the presence of such economic and social uncertainty, there is significant interest in examining not only the costs and benefits of different policy options but also their equity-enhancing attributes. This chapter focuses on the latter, examining the distributional impact of Jordan’s key fiscal policies on both the tax and the social spending sides. We use data from Jordan’s 2010 Household Expenditure and Income Survey (HEIS) in conjunction with data from administrative accounts, applying the Commitment to Equity (CEQ) methodology in our analysis (Lustig [forthcoming]). We cover the impacts of the primary fiscal policies employed by the government, such as direct taxes (personal income taxes); indirect taxes (sales taxes); direct transfers; indirect subsidies (subsidies for food, oil, electricity, and water); and in-kind benefits (benefits for education and health).
Although the data for the study may appear a bit dated, they correspond to the country’s most recent official poverty estimates. Major changes have taken place since 2010—the influx of Syrian refugees perhaps being the most notable— and Jordan currently grapples with how to provide services to its citizens as well as to the refugees. The country has also initiated several ambitious reform efforts, such as drastically reducing subsidies on petroleum products in November 2012 (Atamanov, Jellema, and Serajuddin 2015; Inchauste, Mansur, and Serajuddin 2017).
At the same time, the government’s commitment to equity has remained strong. In May 2015 the government launched an economic blueprint—“Jordan 2025: A National Vision and Strategy”—that proposes a 10-year strategy for economic and social development (Government of Jordan 2015). Important targets of this blueprint include halving poverty rates and enhancing equality of opportunity for citizens. In the context of such targets, the study presented in this chapter can serve as a benchmark for assessing the equity or distributional aspects of existing policies and for subsequently assessing the equity aspects of alternative policies.
Our analysis results in several main findings. Among them, we find that the Jordan’s fiscal system is mostly progressive, as it decreases the poverty headcount and inequality in the country. More specifically, direct taxes (personal income taxes), direct cash transfer programs, and in-kind education benefits are very progressive. In contrast, indirect taxes appear to be regressive in Jordan, as they seemingly increase income inequality. This suggests that the poor and the middle class could potentially benefit from changes in the general sales tax (GST) system, because they currently spend a greater fraction of their incomes on indirect taxes than do the wealthier households.
We organize this chapter as follows: The next section discusses the fiscal instruments the Jordanian government uses to tackle poverty and inequality, including the income tax, the GST, the direct transfer program, the subsidy program, the pension system, and in-kind benefits such as education and health care. The “Data, Methodology, and Assumptions” section explains the data set and methodology used for our analysis and clarifies the underlying assumptions behind the analysis. The “Results” section presents our findings, focusing on topics such as (a) how inequality changes across different concepts of household income, (b) the details of poverty and inequality measures, (c) the progressivity of Jordan’s fiscal system, and (d) the income mobility of poor households. Finally, the “Conclusion” summarizes the chapter’s findings.
Alam, Shamma A., Gabriela Inchauste, and Umar Serajuddin. "The Distributional Impact of Fiscal Policy in Jordan." In The Distributional Impact of Taxes and Transfers: Evidence from Eight Low-and Middle-Income Countries, edited by Gabriela Inchauste and Nora Lustig, 179-198. Washington, DC: World Bank, 2017. License: Creative Commons Attribution CC BY 3.0 IGO