THE REDISTRIBUTIVE EFFECTS OF GOVERNMENT FISCAL POLICY IN IRAN (1970-80)

In the past few decades, increasing concern with distribution rather than growth prompted numerous estimates of the incidence aspects of government activities. Because of this newly realized importance, comprehensive empirical urban/rural studies of budget incidence were undertaken in this research. The extent to which the government has contributed to changes in income inequality through taxing and spending activities was analyzed. In general, the existence of a dual economy has tended to induce the gap between economic growth in urban and rural areas. A relatively sluggish rise of productivity in agriculture, greater investment in urban areas, a higher rate of population growth in rural areas, extreme concentration of wealth among an elite group of high income recipients in urban areas, capital intensive methods of industrialization, the import substitution process, deterioration of agriculture's terms of trade, and migration from rural to urban areas constituted the structural elements which widened the income gap between urban and rural areas. The major findings of this study are: (A) Pre-fiscal incidence distribution of income showed a tendency toward more inequality. Although the overall trend is similar in both areas, income distribution in urban areas was more unequal than in rural areas. (B) Taxes had negative redistributive effects, although these negative effects were higher in urban than rural areas. The existence of a weak tax system, tax exemptions for big corporations, tax evasion and corruption of the tax collecting authorities, contributed positively to income disparities rather than narrowing them. (C) Although government expenditures in absolute terms benefited richer more than poorer households, in relative terms these expenditures reduced inequality as the lower income households received a greater share of the benefits than their share of total income. Among all expenditures general affairs were largely responsible for the reduction in the level of inequality. In general, households in urban areas benefited relatively more from government expenditures than households in rural areas. (D) Fiscal policy was not strong enough to reduce post-fiscal urban/rural disparity, despite the fact that it had minor positive effects toward reducing inequality.