Tax, Twitter and Twisted Concerns

The significant rise in departure tax incorporated by President Hassan Rouhani and his budgetary cadre in the next budget bill for the fiscal March 2018-19 has patently infuriated the Iranian public.

A week past the budget day, the firestorm of criticism toward the government still rages on; people are using social networking platforms such as Twitter to vent their feelings about the threefold rise from the current 750,000 rials ($17) to the proposed budgetary figure of 2.2 million rials ($52).

But they have taken little notice, if any, of the long-awaited bold changes to the subsidy policy that should remove 30 million people from the list of monthly cash recipients.    

Blending the insights of psychology, behavioral economics and the principles of “loss aversion” might explain why the government, either knowingly or unknowingly, took this controversial decision (to distract attention from its more radical proposals) and why people reacted so strongly to it.    

First introduced by Amos Tversky and Daniel Kahneman in “Prospect Theory: An Analysis of Decision under Risk (1979)”, loss aversion refers to people’s tendency to prefer avoiding losses to acquiring equivalent gains. Most people care more about losing what they have than about getting something extra.

Some studies have suggested that losses are twice as painful, psychologically, as gains. Kahneman sums the whole principle up as: “Losses loom larger than corresponding gains.”

The angry reactions to the rise in departure tax also show how disinclined Iranians are in fulfilling one important civic duty: paying taxes.

“Thank you for strengthening our motivation by 100% to flee Iran,” one tweet read while many others used hashtags to say the rise in the tax, “a robbery in broad daylight”, has made them regret the vote they cast for Rouhani in May.

Elites of the country are sadly on the same page as celebrities and ordinary citizens in laboring under the delusion that the government is principally responsible for providing public service through oil and gas resources.

“Most of the statesmen are in the habit of talking about Iran as if they are speaking about a poor country; whereas, Iran is one of the richest in the world,” Nasser Fakouhi, well-known anthropologist, writer and translator, said in protest to the rise in departure tax.

His take makes one wonder whether intellectuals in oil-rich Norway also put forth the same arguments about taxation. If yes, how come tax-GDP ratio in the Scandinavian country is 38% while it is hardly 7% in Iran?

Political engagement of Iranian citizens seems to be restricted to their vote for president. They want their politicians to be accountable, see democracy thrive and have a comprehensive welfare state, but are unwilling to embrace one of the core tenets of democracy i.e. paying their fair share in taxes, including departure tax.

 Tackling a Historical Problem

The new departure tax of $52 per person seems reasonable and fair when we are reminded about the country’s historical problem of capital flight disguised as overseas tourism spending.

“Every year, as many as 9.2 million Iranians travel overseas, which puts the capital exiting the country at about $9 billion, assuming each take only $1,000 out,” Government Spokesman Mohammad Baqer Nobakht said on Thursday.

That’s an incredibly high amount vanishing from the country each year and putting pressure on the exchange market.

Despite the fact that the government could have employed more meaningful approaches to tackle this problem such as giving up on artificially overvaluing the rial (a kind of import subsidy for Iranians eager to travel to and spend lavishly in neighboring countries), the rise in departure tax might, to some extent, curb this hefty capital outflow.

Hefty is an understatement, given the new highs US dollar hit against the rial in months leading to the Iranian New Year holidays in March or the mass pilgrimage of Arbaeen to neighboring Iraq, which coincided with early November this year.

“A nation that doesn’t pay taxes can’t demand accountability on the part of government or expect democracy to reign in their country. Having oil revenues at their disposal, governments tend to become unanswerable to people. Democracy is closely intertwined with an equitable taxation regime,” prominent economist, Saeed Laylaz, says.

 Can’t Have Your Cake and Eat It

A study entitled “Taxation, Loss Aversion and Accountability: Theory and Experimental Evidence for Taxation’s Effect on Citizen Behavior” by Lucy Martin of Yale University can vouch for the claim that nations can’t have their cake (democracy and accountability on the part of the government) and eat it (hand over the responsibility of paying for the services and goods they receive to natural resource rent).  

Martin says low taxes and high aid flows are a recipe for disengaged citizens and, therefore, for less effective governments. Her argument hinges on the similar rationale of “loss aversion”.

If aid money is siphoned off by corrupt politicians, people are miffed, but if they discover that their taxes have suffered the same fate, they are furious.

In other words, taxpayers feel the loss of money they once had more acutely than that of funds they might have received. You would, therefore, expect a high-tax country to have more politically engaged citizens and thus better functioning institutions than one that depended on aid, even if their government budgets constitute a similar share of GDP.