The Effects of Indirect Taxes and the Government Expenditures on Employment and Inflation: An Input-Output Analysis

Considerable indirect taxes are obtained to finance different expenditures of governments. The indirect taxes have different and to somewhat contrary effects in the economy. This paper investigates on the effects of the indirect taxes on sectors’ products to finance the government expenditures. Using an input-output analysis, the effects of this policy on the cost-push price inflation and employment are examined. To do so, an input-output table of Iran for the year 2001/2 is employed as database. A simultanous consideration to the contractionary effect of the indirect taxation with the expansionary effect of the expenditures financed by these taxes is taken into account. Results of the research demonstrates that excuting this policy leads to an increment in the value of the producer price index (PPI) as well as improvement in the level of employment. However, the size of these effects are different for different sectors of economy.