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

Figures & data

Figure 1. A framework to define income concepts and combine fiscal interventions. Source: Lustig (2018) with some adaptation.

Note: Core Income Concepts in dark blue background, Fiscal Interventions in white background.

Table 1. Iranian government revenues and expenditures (1390 Iranian calendar, equivalent to 2011–12).

Panel A. Government revenues
Categories	% of total revenue	% of GDP	Included in analysis
Total Revenues	100%	27.00%
Tax revenues	24.07%	6.50%
Direct taxes, of which:	14.21%	3.84%
Personal Income Tax	3.14%	0.85%	Yes
Corporate Income Tax	10.26%	2.77%	No
Wealth Tax	0.81%	0.22%	No
Indirect Taxes	9.86%	2.66%	Yes
Non-tax revenues	75.93%	20.50%
Sales of natural resources, capital, and financial assets	55.23%	14.91%	No
Other Revenues	20.70%	5.59%	No
Panel B. Government expenditures
Categories	% of total expenditure	% of GDP	Included in analysis
Total expenditure	100%	27.00%
Social spending	50.68%	13.69%
Targeted Subsidy Program	10.91%	2.95%	Yes
Social protection	11.84%	3.20%
Social assistance, of which:	3.85%	1.04%
Assistance to the Low-Income Families and Orphans	1.59%	0.43%	Yes
Assistance to the Families of Martyrs and wounded soldiers.	2.23%	0.60%	Yes
Other	0.03%	0.01%	Yes
Social security, of which:	7.99%	2.16%
Retirement Pensions: Civilians	4.49%	1.21%	Yes
Retirement Pensions: Armed Forces	3.50%	0.95%	Yes
Education, of which:	16.58%	4.48%
12-K (Primary and Secondary)	7.79%	2.10%	Yes
Adult Literacy	0.14%	0.04%	No
Tertiary	7.89%	2.13%	Yes
Other	0.76%	0.20%	No
Health	9.24%	2.50%	Yes
Housing (urban and rural)	2.12%	0.57%	No
Other expenditures	49.32%	13.32%	No

Source: Own calculations using Adlband (2011) and SCI (2015).

Note: The total revenues and expenditures are equal to each other and equal to 1,697,255 billion Rials (about 163.76 billion dollars). The raw data is from Iran’s budget in which total revenues and expenditures are equal, but that is due to the elements such as borrowing from the public and banks as well as the sales of public firms which close the deficit gap. The GDP of Iran for this period is 6,285,255 billion Rials (about 606.45 billion dollars).

Table 2. Distribution of individuals and households according to socio-economic group.

In Daily US 2005 PPP	Socio-Economic Group	Number of individuals (% share)	Number of households (% share)	Average size of household
0–1.25	Ultra Poor	2,875,462 (3.62%)	729,004 (3.45%)	3.9
1.25–2.5	Extreme Poor	5,284,959 (6.65%)	1,305,675 (6.17%)	4.0
2.5–4	Moderate Poor	8,586,729 (10.80%)	1,930,893 (9.13%)	4.4
4–10	Vulnerable	32,281,101 (40.60%)	7,810,339 (36.91%)	4.1
10–50	Middle Class	29,755,312 (37.42%)	9,026,572 (42.66%)	3.3
50 or more	High Income Class	728,130 (0.92%)	356,549 (1.69%)	2.0
Total		79,511,694	21,159,033	3.8

Source: Own calculations using the Iranian household survey (1390 Iranian calendar, equivalent to 2011–12).

Note: The total population slightly exceeds the actual population for this year due to the application of survey weights. Socio-Economic group is determined according to the ‘Market Income’. PPP stands for Purchasing Power Parity. In calculating PPP values, we use the 2005 round of ICP (International Comparison Program) as reported in the World Development Indicators (WDI) published by the World Bank. To change monetary values from the year of survey to 2005, we use the CPI index from the WDI.

Table 3. Marginal contribution of taxes and transfers to inequality.

Fiscal Intervention		Progressivity (Kakwani Index)	Marginal contribution to the Gini index of:
			Disposable Income (0.3686)	Consumable Income (0.3712)	Final Income (0.3432)
Direct Taxes and Contributions	Income Tax	0.2274	0.0018	0.0018	0.0019
	Employee contributions to the health insurance	0.0002	0.0003	0.0002	0.0004
	Employer contributions to the health insurance	0.0455	0.0008	0.0007	0.0009
	Total Direct Taxes and Contributions	0.0855	0.0029	0.0028	0.0032
Direct Transfers	Targeted Subsidy Program	0.4164	0.0527	0.0552	0.0465
	Social Assistance	0.8205	0.0043	0.0045	0.0040
	Semi-cash Transfers (Food)	0.3018	<0.0000	<0.0000	<0.0000
	Total Direct Transfers	0.4384	0.0583	0.0611	0.0516
Indirect Taxes (Sales Taxes)		−0.1363	–	−0.0026	−0.0025
In-kind Transfers	Education Transfers	0.3485	–	–	0.0226
	Education User-fees	0.0682	–	–	0.0018
	Health Transfers	0.4171	–	–	0.0177
	Health User-fees	0.1611	–	–	−0.0075
	Total In-kind Transfers	0.5886	–	–	0.0290

Source: Own calculations using the Iranian household survey (1390 Iranian calendar, equivalent to 2011–12).

Note: The Kakwani index is calculated with respect to the ‘Market Income’.

Table 4. Marginal contribution of taxes and transfers to poverty.

Fiscal Intervention		Marginal contribution to the $4 PPP poverty headcount index of:		Marginal contribution to the Urban-Rural Poverty headcount index of:
		Disposable Income (0.0939)	Consumable Income (0.1057)	Disposable Income (0.2581)	Consumable Income (0.2805)
Direct Taxes and Contributions	Income Tax	−0.0004	−0.0005	−0.0031	−0.0029
	Employee contributions to the health insurance	−0.0013	−0.0014	−0.0044	−0.0059
	Employer contributions to the health insurance	−0.0008	−0.0005	−0.0045	−0.0053
	Total Direct Taxes and Contributions	−0.0024	−0.0021	−0.0119	−0.0138
Direct Transfers	Targeted Subsidy Program	0.1131	0.1190	0.1473	0.1513
	Social Assistance	0.0104	0.0111	0.0099	0.102
	Semi-cash Transfers (Food)	0.0001	0.0002	0.0002	0.0004
	Total Direct Transfers	0.1217	0.1277	0.1554	0.1591
Indirect Taxes (Sales Taxes)		–	−0.0118	–	−0.0224

Source: Own calculations using the Iranian household survey (1390 Iranian calendar, equivalent to 2011–12).

Note: PPP stands for Purchasing Power Parity. In calculating PPP values, we use the 2005 round of ICP (International Comparison Program) as reported in the World Development Indicators (WDI) published by the World Bank. To change monetary values from the year of survey to 2005, we use the CPI index from the WDI. Urban-Rural poverty lines are based on Negahdari et al. (2014, 2015) which differentiate between households based on their size and whether they are located in an Urban/Rural area.

Table 5. Impact and spending effectiveness indicators for taxes and transfers in Iran.

Fiscal Intervention		Impact Effectiveness with respect to:			Spending Effectiveness with respect to:
		Disposable Income	Consumable Income	Final Income	Disposable Income	Consumable Income	Final Income
Direct Taxes and Contributions	Income Tax	0.3445	0.3384	0.3611	0.3461	0.3399	0.3625
	Employee contributions to the health insurance	0.0476	0.0357	0.0765	0.0479	0.0359	0.0770
	Employer contributions to the health insurance	0.1243	0.1152	0.1388	0.1252	0.1161	0.1397
	Total Direct Taxes and Contributions	0.1701	0.1613	0.1901	0.1725	0.1636	0.1925
Direct Transfers	Targeted Subsidy Program	0.3603	0.3648	0.3353	0.2848	0.2872	0.2623
	Social Assistance	0.4122	0.4172	0.4061	0.4022	0.4069	0.3969
	Semi-cash Transfers (Food)	−0.0377	−0.0381	−0.0543	N/A	N/A	N/A
	Total Direct Transfers	0.3747	0.3795	0.3498	0.2943	0.2969	0.2721
Indirect Taxes (Sales Taxes)		–	−0.1284	−0.1250	–	N/A	N/A
In-kind Transfers	Education Transfers	–	–	0.2163	–	–	0.1713
	Education User-fees	–	–	0.1514	–	–	0.1530
	Health Transfers	–	–	0.3002	–	–	0.2660
	Health User-fees	–	–	–0.2361	–	–	N/A

Source: Own calculations using the Iranian household survey (1390 Iranian calendar, equivalent to 2011–12).

Note: Fiscal interventions with an N/A are the ones with a negative marginal contribution, so it is mathematically impossible to calculate the spending effectiveness for them.

Table 6. FI-FGP effectiveness indicators for taxes and transfers in Iran.

Fiscal Intervention		FI-FGP Effectiveness with respect to ($4PPP):		FI-FGP Effectiveness with respect to (Urban-Rural poverty lines):
		Disposable Income	Consumable Income	Disposable Income	Consumable Income
Direct Taxes and Contributions	Income Tax	0.9984	0.9964	0.9349	0.9245
	Employee contributions to the health insurance	0.9879	0.9837	0.8719	0.8550
	Employer contributions to the health insurance	0.9964	0.9955	0.9226	0.9075
	Total Direct Taxes and Contributions	0.9945	0.9923	0.9144	0.9009
Direct Transfers	Targeted Subsidy Program	0.1340	0.1492	0.3099	0.3343
	Social Assistance	0.1827	0.2069	0.3589	0.3840
	Semi-cash Transfers (Food)	0.0344	0.0387	0.1293	0.1383
	Total Direct Transfers	0.1464	0.1619	0.3213	0.3456
Indirect Taxes (Sales Taxes)		–	0.9567	–	0.8387
Total System		0.2838	0.4018	0.4174	0.5015

Source: Own calculations using the Iranian household survey (1390 Iranian calendar, equivalent to 2011–12).

Note: PPP stands for Purchasing Power Parity. In calculating PPP values, we use the 2005 round of ICP (International Comparison Program) as reported in the World Development Indicators (WDI) published by the World Bank. To change monetary values from the year of survey to 2005, we use the CPI index from the WDI. The FI-FGT effectiveness indicators are bounded between zero and one and the higher the value of an indicator, the better the tax is in not increasing poverty and a transfer is in reducing poverty. Urban-Rural poverty lines are based on Negahdari et al. (2014, 2015) which differentiate between households based on their size and whether they are located in an Urban/Rural area.

Table 7. Alternative policies for how to manage Targeted Subsidy Program and their effect on inequality and poverty.

Panel A. Inequality
Policy	Marginal contribution to the Gini index of:
	Disposable Income (DI)	Consumable Income (CI)	Final Income (FI)
Baseline (All income deciles receive the subsidy)	0.0527 (Gini of DI: 0.3686)	0.0552 (Gini of CI: 0.3712)	0.0465 (Gini of FI: 0.3432)
Alternative Baseline: (Baseline with income concepts calculated using reported household expenditure)	0.0647 (Gini of DI: 0.3570)	0.0680 (Gini of CI: 0.3570)	0.0532 (Gini of FI: 0.3140)
Second Phase: No subsidy for top 20%	0.0628 (Gini of DI: 0.3586)	0.0655 (Gini of CI: 0.3609)	0.0559 (Gini of FI: 0.3336)
Policy Simulation 1: No subsidy for top 40% and an extra 30% for bottom 60%	0.0834 (Gini of DI: 0.3379)	0.0868 (Gini of CI: 0.3397)	0.0742 (Gini of FI: 0.3153)
Policy Simulation 2: No subsidy for top 40% and an extra 60% for bottom 30%	0.0916 (Gini of DI: 0.3297)	0.0953 (Gini of CI: 0.3312)	0.0816 (Gini of FI: 0.3080)
Panel B. Poverty
Policy	Marginal contribution to the $4 PPP poverty headcount index (PHI) of:		Marginal contribution to the Urban-Rural poverty headcount index (PHI) of:
	DI	CI	DI	CI
Baseline (All income deciles receive the subsidy)	0.1131 (PHI of DI: 0.0939)	0.1190 (PHI of CI: 0.1057)	0.1473 (PHI of DI: 0.2581)	0.1513 (PHI of CI: 0.2805)
Alternative Baseline (Baseline with income concepts calculated using reported household expenditure)	0.1501 (PHI of DI: 0.1211)	0.1602 (PHI of CI: 0.1348)	0.1578 (PHI of DI: 0.3662)	0.1586 (PHI of CI: 0.3923)
Second Phase: No subsidy for top 20%	0.1131 (PHI of DI: 0.0939)	0.1190 (PHI of CI: 0.1057)	0.1473 (PHI of DI: 0.2581)	0.1512 (PHI of CI: 0.2806)
Policy Simulation 1: No subsidy for top 40% and an extra 30% for bottom 60%	0.1387 (PHI of DI: 0.0682)	0.1469 (PHI of CI: 0.0778)	0.1832 (PHI of DI: 0.2222)	0.1908 (PHI of CI: 0.2410)
Policy Simulation 2: No subsidy for top 40% and an extra 60% for bottom 30%	0.1578 (PHI of DI: 0.0492)	0.1679 (PHI of CI: 0.0568)	0.1819 (PHI of DI: 0.2236)	0.1837 (PHI of CI: 0.2481)

Source: Own calculations using the Iranian household survey (1390 Iranian calendar, equivalent to 2011–12).

Note: PPP stands for Purchasing Power Parity. In calculating PPP values, we use the 2005 round of ICP (International Comparison Program) as reported in the World Development Indicators (WDI) published by the World Bank. To change monetary values from the year of survey to 2005, we use the CPI index from the WDI. Urban-Rural poverty lines are based on Negahdari et al. (2014, 2015) which differentiate between households based on their size and whether they are located in an Urban/Rural area.

Table 8. Effectiveness of targeted subsidy program in alternative policy scenarios.

Panel A. Impact Effectiveness
Policy	Impact Effectiveness with respect to:
	Disposable Income	Consumable Income	Final Income
Baseline	0.3603	0.3648	0.3353
Alternative Baseline	0.3804	0.3852	0.3468
Second Phase	0.4850	0.4891	0.4586
Policy Simulation 1	0.6447	0.6479	0.6103
Policy Simulation 2	0.7077	0.7108	0.6709
Panel B. Spending Effectiveness
Policy	Spending Effectiveness with respect to:
	Disposable Income	Consumable Income	Final Income
Baseline	0.2848	0.2872	0.2623
Alternative Baseline	0.2874	0.2890	0.2572
Second Phase	0.4111	0.4133	0.3852
Policy Simulation 1	0.5747	0.5764	0.5377
Policy Simulation 2	0.6435	0.6452	0.6025
Panel C. FI-FGP Effectiveness
Policy	FI-FGP Effectiveness with respect to ($4PPP):		FI-FGP Effectiveness with respect to (Urban-Rural poverty lines):
	Disposable Income	Consumable Income	Disposable Income	Consumable Income
Baseline	0.1340	0.1492	0.3099	0.3343
Alternative Baseline	0.2050	0.1138	0.4574	0.3444
Second Phase	0.1586	0.1766	0.3669	0.3957
Policy Simulation 1	0.1798	0.2012	0.4393	0.4747
Policy Simulation 2	0.1921	0.2160	0.4769	0.5103

Source: Own calculations using the Iranian household survey (1390 Iranian calendar, equivalent to 2011–12).

Note: The description of policy scenarios are as follows. Baseline: all income deciles receive the subsidy; Alternative Baseline: The same as Baseline with income concepts calculated using reported household expenditures; Second Phase: No subsidy for top 20%; Policy Simulation 1: No subsidy for top 40% and an extra 30% for bottom 60%; Policy Simulation 2: No subsidy for top 40% and an extra 60% for bottom 30%. PPP stands for Purchasing Power Parity. In calculating PPP values, we use the 2005 round of ICP (International Comparison Program) as reported in the World Development Indicators (WDI) published by the World Bank. To change monetary values from the year of survey to 2005, we use the CPI index from the WDI. Urban-Rural poverty lines are based on Negahdari et al. (2014, 2015) which differentiate between households based on their size and whether they are located in an Urban/Rural area.

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