Simulation of Growth and Welfare Effects of Taxation Reform in Iran: An OLG-CGE Analysis

One of the most fundamental questions of the public finance and policy makers is to select a proper tax basis. Great importance is thus attached to the tax structure due to its effects on the economic growth and saving. In this study, taxation reform has been taken into account from the macroeconomics and welfare perspectives. The proposed model in the present work is a dynamic overlapping generations computable general equilibrium (OLG-CGE) model, which has been designed based on the frameworks used by Auerbach & Kotlikoff (1987) and Rasmussen & Rutherford (2001). Besides, this model has been modified in terms of the Iranian economic framework. Simulation results of the dynamic research model with respect to our defined scenarios show that, wage tax and capital income tax generally have a negative effect on the economic growth and investment parameters. The wage tax exerts a larger effect than the capital income tax on the aforesaid parameters. For evaluation of the welfare effects of the tax reform, Hicks criterion for compensating variation (CV) has been used. Welfare analysis of the tax reform indicates the positive effects of the wage tax and capital income tax on the household welfare.