Investigating the Welfare Effects of Income and Consumption Taxes

This study investigates welfare impacts of income and consumption tax bases, using a CGE model of Iran's economy in 2011. The results indicate that, under a fixed government revenue, a switch from income to consumption taxation increases total welfare; however, the welfare rise is heterogeneous between income deciles. The mentioned reform causes the welfare index of low-income deciles to decrease more than the others. As income levels increase, the negative welfare effect decreases, although in the last decile (both rural and urban) the decreasing pattern turns into an increasing one, due to tax evasion in higher deciles of income. Overall, results show that the negative effects of mentioned reform are greater on low-income deciles and therefore it is necessary to simultaneously extend social security for low-income households.