A Minimum Applicable Value-Added Tax Rate: Evidence for Iran

However the traditional tax policy designed seems to be realistic and does not rely on the political attitudes, but it is not reflexible and dynamic and therefore not desirable, because of the restricted and narrowed tax base. Thus, moving to a variety and broaden tax base to enhance the ability of observing revenue would be necessary. So tax reform, as making the old indirect tax system rational and replacing by a value-added tax should be inevitable. The government of Iran decided to act in this manner. The main aims of this paper are to predict value-added revenues and determine its minimum applicable rate. In this regard a model to simulate value added-tax revenues for economy of Iran, that highly rely on the indirect tax, included sales, excise tax and import tariffs, is introduced. The study shows that the potential tax base for the ordinary Mackenzie model and also for the model proposed in this paper is 20. 8 percent of the gross domestic product. The government should apply the minimum tax base equal to 11. 66 percent under value-added tax, if it is decided to yield as much revenue as the prevailing tax system.