DEMOGRAPHIC SHIFTS AND TAX BURDEN IN THE IRANIAN ECONOMY: A MACROSIMULATION APPROACH

Abstract

Using dynamic stochastic general equilibrium (DSGE) model, this paper addresses the effects of demographic changes on tax dynamics. In fact, the DSGE framework involves main demographic features such as working and retirement periods as well as life cycle characteristics on one hand and other special conditions of Iran’s economy such as rigidities in nominal variables, distinct trait of government budget and lack of monetary and fiscal standard rules on the other. After calibration of parameters and determination of steady state values of the variables, we identified some demographic scenarios, such as reduction in the labor growth rate, increasing retirement age and improvement life expectancy and then assessed macro variables, particularly tax share, reaction to these shocks. Our results highlight that, demographic negative shocks have a significant effect on the budget deficit. A plummet (surge) in labor growth rate would increase (shrink) tax share to rebalance (smooth) a probable budget deficit(surplus). An analogous result can be attributed to the life expectancy improvement. However, any upswing (slump) in the retirement age has negative(positive) influence on the tax share. In other words, all positive demographic shocks provide opportunity to smooth tax policies and postpone revenue collection.