Inequality of intergovernmental transfer of value added taxes: the case study of Iran

In value added tax law, it was decided to distribute a share of revenue across local municipalities. This intergovernmental tax is the source of income for many local municipalities in developed countries and aimed, among other purposes, to mitigate the inequality across regions. Its allocation scheme has amended annually in budgetary and permanent laws due to its significance. However, there are almost no study to examine the structure of allotment and its consequences on regional disparity. This study benefits from administrative data to calculate Gini coefficients of intergovernmental transfer across provinces and counties. The Gini coefficients across provinces are 0.64 and 0.61 in 2016 and 2017, respectively. In 2018, dues to the change of distribution rules, it increases to 0.87, and it is expected that the new law will exacerbate inequality. The paper proposes new rules such that the transfer would a function of needs and responsibilities by local municipalities.