Taxes and Distribution of Income in Iran: Approach to Threshold Regression

Governments and policy makers of economic system in each country are trying to make suitable income distribution. The income and wealth inequality will cause serious problems in economic, political and social affairs areas. In this case, tax resource is one of the most efficient instruments of governments in order to improve income distribution. This paper is going to answer this question that to what extent the tax system has been effective in achieving this goal. To do so, the threshold regression model has been used during 1974-2012. The estimation results of the model confirm the threshold effect of taxes on income distribution. In other words, before threshold tax, tax revenue divided by GDP has not significant impact on income distribution but after this threshold level, increasing tax revenue divided by GDP has worsened income distribution. The main fact is derived from weakness of Iranian tax system which the major tax burden is on the productive sectors and wage earners and not on the intermediaries and non-productive sectors.