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The Incidence of Taxes and Spending in Sri Lanka

Author

Listed:
  • Nisha Arunatilake

    (Institute of Policy Studies of Sri Lanka)

  • Gabriela Inchauste

    (Poverty and Equity Global Practice at the World Bank)

  • Nora Lustig

    (Stone Center for Latin American Studies, Department of Economics, Tulane University, Commitment to Equity Institute (CEQI).)

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.

Suggested Citation

  • Nisha Arunatilake & Gabriela Inchauste & Nora Lustig, 2017. "The Incidence of Taxes and Spending in Sri Lanka," Commitment to Equity (CEQ) Working Paper Series 63, Tulane University, Department of Economics.
  • Handle: RePEc:tul:ceqwps:63
    as

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    File URL: http://repec.tulane.edu/RePEc/ceq/ceq63.pdf
    File Function: First version, 2017
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    References listed on IDEAS

    as
    1. Kakwani, Nanok C, 1977. "Measurement of Tax Progressivity: An International Comparison," Economic Journal, Royal Economic Society, vol. 87(345), pages 71-80, March.
    2. Ceriani,Lidia & Inchauste Comboni,Maria Gabriela & Olivieri,Sergio Daniel, 2015. "Understanding poverty reduction in Sri Lanka : evidence from 2002 to 2012/13," Policy Research Working Paper Series 7446, The World Bank.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    fiscal policy; fiscal incidence; social spending; inequality; poverty; taxes; Sri Lanka;

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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