Journal of Business & Economic Policy

ISSN 2375-0766 (Print), 2375-0774 (Online) DOI: 10.30845/jbep

Comparison of the Effect of Value Added Tax and Direct Taxes on Iran's Economic Growth
Dr. Hadi Qavami, Mohammad Ali Shabani and Razieh Rahimi

Taxes are generally divided into two categories: direct taxes, which are levied directly on individuals and households, and indirect taxes, which are added to the price of goods and services and are levied on consumers. Value added tax (VAT) is one of the indirect taxes in the category of consumption and sales taxes. Since this tax is levied on consumption and consumption fluctuates less as part of gross domestic product (GDP), the imposition of this tax creates a kind of sustainable income for the government. Considering the consequences and effects of the VAT system, an attempt has been made to identify the sensitivity of GDP compared to direct taxes and VAT. For this purpose, first, the theoretical foundations of endogenous growth models and studies conducted in the past were assessed. Then, the model was estimated based on time series data for the Iranian economy during the period 1973-2016, using the autoregressive distributed lag (ARDL) model. The variables of physical capital inventory, employed labor, direct taxes, and indirect taxes were used as VAT index, and the average years of education were used as human capital index. The results of the model estimate indicated that, in the short run, the direct taxes and VAT variables have a negative and significant effect on GDP, and in the long run, the effect of direct taxes on GDP is negative, but the impact of VAT is positive on production. And the error correction coefficient shows that, in each period, 23% of the imbalance in GDP is adjusted and approaches its long-run trend.

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