Real-Fiscal Linkages of Fiscal Revenue-side in Iran

This paper aims to explain the real-fiscal linkages by identifying the macroeconomic determinants of government revenue in Iran. To achieve this, the dynamic ordinary least squares (DOLS) method was applied using data from 1972 to 2020. The findings indicate that inflation, centralization, the divergence of public prices from market prices, and the concentration of tax collection on labor income tax all have positive effects on government revenue in Iran. In contrast, economic growth and trade openness have negative effects on government revenue. Overall, these findings support implementing an economic growth strategy that is internally comprehensive within the tax system and externally coherent in terms of the economics of growth, and to which the government has a “tight commitment”. “Internally comprehensive” refers to establishing a mature progressive tax system that includes an inflation-adjusted comprehensive income tax along with automatic complete indexation. When complete and explicit automatic indexation is lacking, fiscal authorities may still benefit from inflation, which can lead to persistent political incentives for inflation inertia. “Externally coherent” refers to ensuring that aspects such as openness, decentralization of macro-fiscal decision-making, and the efficient size of government align with the comprehensive tax system to promote economic growth.