Simulated analysis of the effects of increasing the value added tax rate on the variables Macroeconomics using the ORANI-G Iran general equilibrium model

Applying a favorable tax system has important conditions such as justice and efficiency, therefore, consumption tax and income tax will comply with the principles of benefit and ability to pay. In this regard, value added tax is known as the most important innovation of the 20th century in terms of tax collection on consumption. Since increasing government revenue is one of the important goals of imposing this type of tax, the government has tried to determine the rate of this type of tax effectively and efficiently. Disproportionate increase in value added tax rates can have negative social effects on inflation, economic growth, income distribution, and general well-being in society. It may also have disruptive effects on other variables and sectors of Iran's economy. To manage the rate increase, one approach is to simulate and examine its consequences and effects on macroeconomic variables in the form of a multi-regional calculable general equilibrium model (MRCGE). Three different scenarios were applied and examined to simulate the shock effects of the increase in the value-added tax rate (12% , 15% , and 20 %) on four macro variables of Iran's economy: inflation, gross domestic product, consumption, and investment.  The simulations were conducted at the country level using a multi-regional calculable general balance model, known as the ORANI-G Iran model, using the 2016 input-output table and regional accounts of the country. The results indicate that the effect of increasing the tax rate on value-added will increase inflation and investment and decrease GDP and consumption.