Measuring income inequality in Bhutan

Instead of using surveys or household expenditure to measure levels of inequality, Bhutan should use its income tax return data to make the right policy decisions, Tobden Tobden writes.

The Kingdom of Bhutan is committed to improving the quality of life for its people.  This is reflected in its Gross National Happiness policies as well as its Constitution.

Bhutan endeavours to develop and execute policies to minimise income inequality and the concentration of wealth, while promoting the equitable distribution of public facilities across the country.

Rapid socio-economic development has transformed the country significantly over the past few decades. Growing prosperity has widened the disparity between its income groups.

Inequality in Bhutan has been on the government’s radar since the first living standard survey in 2003.

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These surveys record information on levels of income and expenditure, assets, and other economic metrics concerning households and their members. They also gauge opinions on how the government should help improve overall welfare and social capital conditions.

The country’s National Statistics Bureau undertakes a living standard survey once every five years with the financial support of its development partners. The Asian Development Bank and the World Bank funded living standard surveys in 2007, 2012, and 2017.

While these surveys have led to comprehensive official reporting on poverty statistics by the National Statistics Bureau, in-depth analyses on inequality is still lacking.

Official reports so far – including in 2003, 2007, 2012, and 2017 – only include a brief chapter on inequality. There are no national reports that provide deeper analysis to support national policy frameworks for reducing levels of disparity.

Income distribution is the primary focus for many inequality assessments – several of which use data from household surveys.

While measurements of income are more common when reporting on developed economies, those of expenditure are a better metric for developing economies like Bhutan.

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But gathering data isn’t as simple as it seems – several challenges stand in the way. For example, development partners that conduct these surveys may struggle to find a sustainable source of funding.

Living standard surveys are important to Bhutan as they provide crucial information on its socio-economic conditions, while allowing its government to measure the success of its policies.

The government should, therefore, make a greater effort to finance them. It should fund these surveys permanently and commit to sustaining the initiatives of the National Statistics Bureau.

Should the Bhutanese authorities be incapable of doing so, they should reconsider their current methods of assessing inequality. Instead of employing household surveys, they should consider focusing on income tax return data.

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Another general issue with the household survey is that it fails to capture the highest levels of income in the country. Extremely high incomes are often under-reported in the living standard survey.

Because inequality estimates are sensitive to the inclusion or exclusion of extreme values, current data may not provide reliable inequality estimates.

If Bhutan were to use income tax return data instead, however, the country might not face the same issues. According to its income tax laws, anyone – be they a citizen or a resident with personal income sources in the country – is required to pay tax based on how much they earn.

Tax return data is quite regular in comparison to surveys and censuses. It engages the majority of the population and doesn’t run into the same issues as living standard surveys. Moreover, this kind of data gives valuable insight into levels of inequality across the world – the same applies to Bhutan.

With inequality becoming a growing concern across the world, Bhutan’s current government is also working to ‘narrow the gap’. To do this effectively, however, it must first use the right kind of data to inform its policy decisions. Otherwise, it runs the risk of putting the wrong policies in place.

This article is based on the author’s paper published in the Asia & the Pacific Policy Studies (APPS) journal. You can read the full paper, ‘Estimating the trends in inequality in Bhutan using the recent Living Standard Survey 2017: The importance of adjusting expenditure for household composition’, here.