Welfare Effects of Tax Reforms in Iran: A Dynamic General Equilibrium Model

In recent decades، tax reform has gained lots of policy attentions in most countries in the form of changes in the tax base and tax structure. Due to the excess burden of taxation، economists have made a considerable effort to minimize the distortions. To do so، they choose appropriate tax base or tax combinations in order to increase public welfare. Accordingly، dynamic analysis has gained favor over static analysis in various fields of economics، particularly in fiscal policy. Due to the importance of tax revenues for government and presence of problems such as tax evasion in Iran، tax reform has gained priority in economic reform agenda. This paper uses a dynamic general equilibrium model based on the fifty-five period overlapping generation model of Auerbach and Kotlikoff (1987) to simulate tax reform in Iran. This study is the first in its kind in Iran. The results suggest that there are significant welfare benefits (4-6% increase in lifetime utility) when factor income taxes are replaced by consumption tax.