Fiscal policy, inequality and poverty in Iran: Assessing the impact and effectiveness of taxes and transfers

Using the Iranian Household Expenditure and Income Survey for 2011/12, we apply the marginal contribution approach to determine the impact and effectiveness of each fiscal intervention, and the fiscal system as a whole, on inequality and poverty. Net taxes (combined direct and indirect taxes and transfers) reduce the Gini coefficient by 0.0644 points and the poverty headcount ratio by 61 percent. Based on the magnitudes of the marginal contributions, we find that the main driver of this reduction in inequality is the Targeted Subsidy Program (TSP), a universal cash transfer program implemented in 2010 to compensate individuals for the elimination of energy subsidies. The main reduction in poverty occurs in rural areas, where the headcount ratio declines from 44 to 23 percent as opposed to urban areas that experience a modest reduction in the headcount ratio from 13 to 5 percent. Taxes and transfers are similar in their effectiveness in achieving their inequality-reducing potential. By achieving 40 percent of its inequality-reducing potential, the income tax is the most effective intervention on the revenue side. On the spending side, Social Assistance transfers are the most effective programs which achieves 45 percent of their potential. While taxes are especially effective in raising revenue without causing poverty to rise, transfer programs in general and the TSP in particular are not effective in reducing poverty since the bulk of them are not targeted toward the poor. Using simulation, we show how policy makers can improve the effectiveness of the TSP in reducing poverty.