The Effect of Gradual Elimination of Subsidies on VAT Income in Iran

In this paper, a systematic model is used to estimate the effect of gradual elimination of subsidies, on VAT income. Reduction of subsidies influences consumption through raising prices as VAT is consumption based tax. In this paper, we use 3SLS model to find the inter relationships of subsidies with consumption and CPI during 1973-2008. Ultimately, the income gains of VAT during the coming years have be forecasted. The result of our study indicates that private sector's demand will increase following an initial reduction and a shift in constant value of demand curve. It means a change in consumption behavior model. On the other hand, we expect drastic rise in prices in 2010-2011 between 19-36 percent. We expect a gradual rise in VAT in coming years.