An Empirical Analysis of Effects of Direct Taxes on Income Distribution in Iran:A FAVAR Approach

Undesirable social and economic consequences of income inequality persuade the governments to give a first priority to the income distribution improvement and pursue plans to reduce inequality in the form of income redistribution policy, resource allocation and stabilization of macroeconomic indices. Taxes in addition to being the most important source of government revenues are one of the most effective policy tools in improving income distribution. In this paper, using a FAVAR method and quarterly data for the period 1990-2014 for 99 macroeconomic variables, the impact of direct taxes on the Gini coefficient, as an indicator of income distribution, have been explored. Impulse response functions show that a positive shock of one standard deviation in direct taxes causes a sustainable reduction in the Gini coefficient and improves income distribution. Also, variance decomposition results show that after the fourth season, tax shocks have the most important role in the dynamics of Gini coefficient. This study also rejects Kuznets Hypothesis for the Iranian economy.