Evaluating the effect of deposit interest tax on the bank deposits

Extended Abstract
This study analyzes and evaluates the effects of deposit interest tax on the quantity of bank deposits. Examining the experience of the past few decades of the country's economy shows that deposit interest tax never been applied and no historical and informational records have been created for it. Therefore, the evaluation of a policy that has not been carried out so far is inherently complicated and has limitations. In this research, in order to reduce the consequences of such restrictions, bank deposit interest rate changes have been considered as an alternative to deposit interest tax. The effect of bank interest rate changes on the quantity of deposits is estimated in the form of an econometric model and with the ARDL method, in which the effect of two variables, the informal market exchange rate and the gross domestic product, is also analyzed. The estimation results show that the real GDP has not been able to statistically affect the amount of deposits. But on the other hand, the exchange rate of the informal market is one of the things that significantly affects the amount of deposits. Based on the designed model, in addition to the estimated coefficient, the effect of the deposit interest tax on the amount of deposits, depends on the nominal rate of deposit interest in the banking system and the inflation rate in the economy..

Tax exemption of bank deposit interest is one of the topics discussed in the Iran's tax system in recent decades. The existence of this exemption in the Iran's economic history is probably aimed for stabilizing economic fluctuations and supporting investors by attracting resources to the banking system. But the results of the analysis of the effect of this exemption show that its costs are more than the benefits. The implications of the tax on deposit interest, which is part of the benchmark tax system (BTS), and the prevailing difficult economic conditions in recent years due to external factors such as international sanctions, are two things that make it necessary to implementation of this tax for Iran's economy. Moreover, a comparative study in this field also shows that deposit interest is taxed in most countries, although at different rates. However, each of them have different approaches in applying this type of tax according to the state of technical and executive infrastructures and the quality of policy making. One of the difficulties of examining the issue is that in the economic history of the country, tax on bank deposit interest has never been applied and no historical and information records have been created for it. Therefore, the policy that has not been implemented until now, its evaluation is inherently complicated and has limitations. In this report, to reduce the consequences of such limitations, bank deposit interest rate changes are considered as an alternative to deposit interest tax. For this reason, such a choice has been made that the application of tax on bank deposit interest implicitly means the change of the said interest rate. However, changes in bank deposit interest rates are different in nature from changes in tax rates on deposit interest. Due to the choice made in the method of achieve to goals of this study, it is necessary to study and analyze the bank interest rate and the effects of its change on the amount of deposits theoretically and empirically. Then, in the next step of the report, the method of evaluating the effects of bank interest rate changes and the econometric model used for this purpose will be examined. Finally, the findings of this evaluation and policy recommendations based on those findings are presented in the final part of the report. Of course, it is an attempt to give recommendations to the limitations that exist in applying findings of the research, attention has been paid and considering these limitations, recommendations and policy measures have been proposed.

The analysis of this study is derived from the analytical framework of brokers' behavior in financial markets, which is presented under basic assumptions such as pursuing maximum profit and utility by brokers. In Iran's economy, due to the prevailing price fluctuations and instability in the last few decades, it is more likely to accept the strong assumptions that form the hard core of the aforementioned analytical framework. But what is important here is whether the transfer of resources and assets from the banking system to other markets was significant enough to affect the performance of other markets. Therefore, the test of the effects of changing the deposit interest rate in this study is the answer to the mentioned question.
The variables whose effect is tested on the volume of non-visual deposits (thousand billion Rials) are; Bank deposit interest rate (percentage), informal market exchange rate (Rials), GDP (billion Rials), whose data are used for the period 1361-1400. The method used for the above effectiveness test is the Autoregressive with distributed lags model (ARDL), which is performed using Eviews software.

The purpose of studying the relationship between the bank interest rate and the volume of non-visual deposits was evaluating the effect of the deposit interest tax on the volume of deposits.
The comparison of the results of all three states that were displayed in the recent tables, induces this view to the reader that the third state; Considering the lowest tax rate that is levied, the small deposit withdrawal that happens from the banking system, and the relatively favorable revenue collection capacity that can be received, it is a suitable option for levying the bank deposit interest tax. Of course, the tax rate of 3% on bank deposit interest can be the beginning of the gradual process of levying tax on deposit interest. The gradual process of implementing this policy will be a useful issue due to the sensitivity of the tax on deposit interest.

Therefore, by fixing the mentioned rates, the effect of deposit interest tax has been analyzed in three cases of 5%, 10% and 3% tax rates. Based on the findings of the model, taking into account the bank interest rate of 20% and the inflation rate of 40% for the economy, applying a tax rate of 3% (10%) will reduce 23 billion Tomans (77 billion Tomans) of deposits from the banking system in one year