Fiscal Drag in Iran

Document Type : Scientific-research

Authors

1 M. A. in Economics of the Arts and Culture; Member of Calligraphers Association of Iran

2 Associate Professor of Department of Economics and Management, Shiraz Branch, Islamic Azad University, Shiraz, Iran (Corresponding Author).

3 Associate Professor of Department of Economics and Management, Shiraz Branch, Islamic Azad University, Shiraz, Iran.

4 Assistant Researcher in Economics, Institute for Humanities and Cultural Studies, Tehran, Iran

10.30465/ce.2024.48777.1965

Abstract

Have nominal and real fiscal drags occurred in Iran’s economy? Answering this question requires estimating the effect of real economic growth and inflation on government tax revenues relative to GDP. Using the Dynamic Ordinary Least Squares (DOLS), this paper tests the occurrence of fiscal nominal and real drag/anti-drag in Iran's economy from 1972 to 2020. The results indicate that the effect of growth and inflation on the relative tax revenue has become negative and positive, respectively. This means that both real fiscal anti-drag and nominal fiscal drag have simultaneously occurred in Iran, which documents the implicit practices of over-indexing. Moreover, the more Iran's economy becomes open, the more fiscal affairs become decentralized - especially taxation-, and the more the government becomes compliant with relative market prices in the supply of public goods, the more the drag effect of taxation will significantly reduce. Overall, these findings support the idea of designing a coherent economic growth strategy in conjunction with the establishment of an advanced progressive tax system based on comprehensive income taxation that properly addresses the various dimensions of full-indexation, extroversion, decentralization, tax efficiency, and monetarism - adjustment of prices towards the market prices.
JEL Classification: H20, H30, E31, O40, C32

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References

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History

  • Receive Date: 20 April 2024
  • Revise Date: 08 July 2024
  • Accept Date: 10 July 2024

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