The Asymetric Effect of Tax on Income Distribution in Iran

The main purpose of this study is to explore the relationship between “direct and indirect taxes” and “inequality of income distribution” in Iran. So, we have used annual time series data of the direct taxes to GDP ratio, indirect taxes to GDP ratio, and the Gini coefficient during 1982-2014. The results of the threshold unit root tests with an asymmetric adjustment show that all variables have a unit root. According to the results of the threshold cointegration tests, the direct taxes have significant negative effects on the inequality of income distribution in the long-run. In addition, the results of the Threshold Error Correction Model (TECM) indicate that positive and negative deviations from the long-run equilibrium have different speeds of adjustment. In contrast, the findings show that direct taxes have significant positive effects on the inequality of income distribution in the short-run and such effects are asymmetric such that the response of the Gini coefficient to a decrease in the share of direct taxes is higher than its response to the increase in the share of direct taxes in GDP. However, the results indicate that indirect taxes have no significant effect on the income inequality in both short-run and long-run.