Consumption and Corporate Income Tax Effects on Production

One of the most important considerations for designing a proper tax system is to not disturb economic system as much as possible. This study compares the economic effects of consumption and corporate income taxations, using a Computable General Equilibrium (CGE) model. The model is calibrated using the Social Accounting Matrix and the Input-Output table of Iran’s economy in 2011. First, we assess a scenario in which consumption tax has been raised gradually up to 100% of its base amount, along with a proportional decrease in corporate income tax. Overall, the government tax revenue is held fixed. Here, the intermediary goods become expensive, causing the production to decline. Moreover, we observe a rise in savings and investment, however, this has no effect on production since savings are not entering the production process in short run. The second scenario is a dynamic one, in which an increase in consumption tax is compensating a decrease in corporate income tax, holding government budget fixed. As in the static model results, we observe a rise in intermediary goods prices, a reduction in the production of the first period, but also an increase in future production which is construed as the result of an increase in savings and investment streaming into the production process in long run.