Economy, Domestic Economy

Call for Closing Income Tax Loopholes

Call for Closing Income Tax LoopholesCall for Closing Income Tax Loopholes

Despite the government’s endeavors over the past years to reduce dependence on oil by boosting tax revenues, taxes have not yet become a tool to contain social and income inequality.

Last week’s publication of tax collection data shows that the government has been successful in collecting the amount of taxes it had set as a goal in last year’s budget.

The 2014/2015 government budget stipulated tax collection of about 700 trillion rials ($21.2 billion at market exchange rate), more than 85 percent of which had been collected in the 11 months of the fiscal year that started on March 21, 2014, according to the National Tax Administration.

Compared to the fiscal year of 2013/2014, the nominal amount of taxes rose by over 50 percent. In the next budget the government plans to collect a total of 861 trillion rials in taxes, a nominal increase of 30.3 percent. Assuming that the CBI’s prediction of 14 percent inflation holds, tax revenue will increase by 14.3 percent in real terms next year.

Taxes played only a secondary role in last year’s budget. While oil revenues constituted 35.5 percent of total revenues, tax revenues only reached 30.2 percent. This looks set to turn around in this year’s budget, which is based on oil prices of $70/bbl. The share of taxes will slightly increase to 32.2 percent, while the share of oil drops to 26.59 percent.

Because the current budget is in real terms larger than last year’s, even despite the sharp drop in oil prices amid lingering western sanctions that inhibit Iran from selling at potentially higher prices, the budget compensates for the drop in oil revenues not only by increasing taxes, but also by aiming to increase the money collected from the privatization of state assets.

While the rapid expansion of tax revenues can be praised, critics argue that the current tax regime might do little to promote social equality. They feel the same about other redistributive policies. Former president Mahmoud Ahmadinejad introduced a subsidy scheme in which almost all Iranian families received a flat cash handout every month. Not only was this scheme blamed for explosive inflation, but many also argue that it worsened income inequality.

Government tax revenues show that income tax plays only a minor role. Much more important are corporate, import and flat consumption taxes like value added taxes.

Out of the 610 trillion rials ($18.5 billion) collected in income tax revenues over the 11 months of the past Iranian year, only 53 trillion rials ($1.60 billion) were collected in income tax from private and public sector employees.

This is while during the same period, 220 trillion rials ($6.66 billion) were collected in taxes from legal entities, accounting for 35% of total tax revenues.

Indirect taxes accounted for nearly 48% of tax revenues, including 89 trillion rials ($2.7 billion) or 15% in import tariffs and 200 trillion rials ($6.06 billion) or 33% in VAT.

Economists believe that the main obstacle to increasing income taxes and turning them into a tool to promote social equality is the lack of an effective income data collection, which according to Hossein Vakili, an official at the National Tax Administration is one reason why people are increasingly opposing the idea of increasing taxes.

 “The biggest pain that taxes impose on people is discrimination. Few people in the country complain that tax ceilings are too high, but Iranians are primarily unsatisfied that tax equity is not being thoroughly observed,” he said.

Jamshid Pajouyan, an economist, believes a major tax reform should be pushed to achieve tax equity.

“Our tax system benefits the rich. The structure of tax ceilings and rates is designed in a way that only the middle class pay their taxes in full. Many companies transfer their tax obligation on to the shoulders of their workers, giving rise to inequality,” he said in an interview with Persian daily Ta’adol.

The only way to introduce tax equity is to expand the collection of information on incomes, Pajouyan believes. However, he points to strong opposition within society to implement an expanded information system. The government’s decades-long dependence on oil revenues instead of income tax has given citizens much leeway in how to compose their incomes. In particular, some of the country’s rich might ferociously oppose a plan to extend the government’s ability to gather income information for fear of additional scrutiny over their business activities.

“Some do not want the government to have access to information on their income because it is possible that they gained some of their money in an illegal or unhealthy way,” he noted.    

Former head of the National Tax Administration, Gholamreza Heydari Kord Zanganeh, also stresses that lack of a comprehensive system to collect data on individuals’ incomes and expenditures should be seen as a big issue.

“The more information can be gathered in a complete and effective way, the more equitable citizens can be taxed. Only in that way can tax equity be established,” he added.