THE IRANIAN TAX SYSTEM: AN EMPIRICAL ANALYSIS

The purpose of this study is an examination of the Iranian tax system in the context of recent developments in oil prices. The reduction in Iran's oil revenues since 1975, has intensified the need to improve the performance of non-oil tax revenues on two grounds. First, in addition to providing an additional source of finance, it can reduce the impact of additional government expenditure on the rate of inflation and the structure of the domestic economy. Second, by strengthening the tax system and its administrative structure, fiscal authorities can devise--more effectively--appropriate tax policies to achieve desired economic objectives. In this study the tax system of Iran is described, analyzed, and evaluated against three broad standards of taxation: (1) equity, (2) efficiency, and (3) adequacy. The specific objectives of the study are: (1) to assess the incidence of the Iranian corporation income tax; (2) to evaluate Iran's tax revenue performance; (3) to explain Iran's low tax efforts; and (4) to assess the effectiveness of the Iranian tax administration. In achieving the first objective, the Krzyzaniak-Musgrave methodology concerning corporate tax incidence is directly linked with the Rao and Rao perspective on entrepreneurial behavior. In evaluating Iran's tax revenue performance, Singer's dummy variable method is used to measure the built-in flexibility of various taxes. Moreover, the Musgrave-Miller coefficient is employed to measure the effectiveness of built-in flexibility. In explaining Iran's low tax efforts, a cross-section model is developed in terms of two general determinants of taxable capacity, namely, the stage of development and the size of the foreign trade sector, in order to conduct an inter-country tax effort analysis. Finally, using development administration techniques, the organization of the Iranian tax administration is analyzed in order to identify the sources of "administrative incapacity.". The results of the analysis point to a picture of rapidly expanding tax bases and discretionary tax changes aimed at reducing tax yield, or in part offset by evasion, exemptions and weak administrative effort in collecting taxes at existing rates. This study presents major policy recommendations concerning the attainment of both a more efficient tax system and an effective administrative structure.