Estimating Elasticity of Government Revenue w.r.t to Statutory Tariffs

Document Type : Research Paper

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Abstract

Custom income is about ۲۰% of Iran’s tax income. Is there a one to one relation between government’s revenue and statutory tax rates? This study assesses the elasticity of government custom revenue with respect to statutory tariff rates, also referred to as the slope of Laffer curve. We also estimate the elasticity of realized tariff rate and the legal imports. The data is from Iran’s custom and the World Bank (WITS). The final data include import values in rial and dollar, weight, statutory and realized tariff rates, from ۲۰۰۷ to ۲۰۱۶. We use fixed effect regressions which captures fixed characteristics of each observation, disaggregated into 6 digits of HS code. Results show that the eleasticty of government income with respect to statutory tariffs is 40 percent. The remaining part (60 percent) is neutralized due to the increase in tax avoidance and evasion. The elasticity of exemptions is estimated equal to about 50 percent and the legal import’s elasticity is about 20 percent. The latter contains both the demand reduction (Leffer effect) and the increase in evasion. Findings are robust to different tests, and indicate a substantial loophole between tariff setting and revenue earning. While reducing in illegal section requires fundamental reforms, the exemptions can be reduced by reconsidering in legal provisions.

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References

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new economy and trad
Volume 14, Issue 4
May 2020
Pages 147-165

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History

  • Receive Date: 05 June 2019
  • Revise Date: 12 August 2019
  • Accept Date: 16 October 2019

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