The Effect of Taxation on Financial Services on Economic Growth in Iran

Reform of the government's revenue system has been emphasized through the share of tax revenues. The comprehensive reform and strengthening of the country's financial system to meet the needs of the national economy and to create stability have been also emphasized. In this regard, one of the ways to enhance the role of tax revenues in financing the general budget of the government is to expand the tax base, which has other benefits for the economic system, including strengthening the regulatory framework and improving the effectiveness of economic policies. Taxes have important effects on the allocation of resources in the economy. In the economic literature, taxation is a kind of intervention in the market mechanism, which results in allocation inefficiency and welfare losses. This inefficiency is considered as a part of the taxation cost, but tax revenues can increase the welfare of the community. Tax rates and exemptions should be set in a way that maximize the overall well -being of society. In Iran's VAT system, some goods and services, including financial services, are tax -exempt. Tax exemption of financial services disrupts the economy.

In this study, to understand the importance of VAT exemption in macroeconomic fluctuations, an attempt has been made to examine the effects of VAT on financial services within the computable general equilibrium model and the response of economic variables to shocks of the various transitions from exempt to full taxation. Using GTAPagg and RunGTAP software, we assess welfare effects, changes in GDP value, changes in private and public sector household demand, and allocation efficiency effects. We also provide a summary of welfare changes due to policy experience for Iran and the financial and insurance services sectors in the form of tax scenarios .

The results show that the rate of social welfare resulting from the imposition of a tax on financial services at the tax rate of 4% (optimal rate) is the highest and the tax rate is 9% for insurance services at the optimal rate .

One of the important results of this research is the changes in government tax revenue that stem from taxes on financial and insurance services in Iran. It is observed that tax revenues have increased due to both tax regimes and the tax revenues from the financial services are higher than tax revenues from insurance services. This shows that financial services in Iran economic space have more tax capacity than insurance services. Looking at the Iranian economy in recent years, it is considered that the economic variables do not depict acceptable conditions. Despite the inflation rate reaching over 47%, it is expected that the Iranian economy will experience a decrease of more than 7% in GDP while the unemployment rate will also increase. Examination of livelihood variables also shows a decline in the consumption level of Iranian households for basic goods. Additionally, during these years, capital accumulation has significantly decreased, and for some production sectors, there is negative capital accumulation. The mentioned situation of the Iranian economy variables shows that Iran is deviated from its long -term growth path and production capacity in Iran's economy is severely degraded. As a result, Iran's economy will be poorer than before and this poverty will reduce consumption.Considering these economic variables, indicators, and research results, such taxes should be applied with great caution, as based on the current economic realities and welfare of society, it can be said that any new tax base until the relative stabilization of the economy and inflation control would result in reducing the consumption of low -income consumers in favor of the government, leading to more unjustified inflation.