Assessing Subsidies and Indirect Taxes in Iran: A Social Welfare Perspective

Abstract

Government fiscal policy can be said to be pro-poor if it benefits the poor more than the nonpoor. This research, by using the concept of social welfare, identifies which goods and services should be subsidized or taxed to maximize social welfare. For this purpose, the concept of the elasticity of the Atkinson social welfare with respect to prices is used to derive a price reform index to assess indirect taxes and subsidies. The results of this research, conducted in Iran’s urban and rural areas during 2003–2007, indicate that increasing the price of food items hurts the poor more than the rich. Subsidizing food items (excluding beverages and tobacco) has been pro-poor while an increase in the price of items like healthcare, transportation, communication and education hurt the rich more than the poor wherein the rich benefit more from subsidies to these items than the poor. In light of these results, a review of subsidies and taxes on the above-mentioned items is warranted to reduce inequality and improve welfare.