Poverty, Inequality and Redistribution

EghtesadOnline: Wealth disparity is more visible in Iran today than it was a decade ago, and this is not an unfounded claim.

News ID: ۷۴۴۹۵۴

13 February 2018

A research entitled “Poverty Reduction Policies and Improvement of Wealth Redistribution” presented at the Second Conference on Iranian Economy in mid-December by economist Mohammad Hosseini can vouch for that.

Ultra-rich Iranians, those who belong to the top income percentile, spend 86 times more than the poorest percentile. On average, they spend 46.62 million rials ($956) on a monthly basis, compared with the poorest who spend 540,000 rials ($11.4) per month. The bottom 10% (the poorest decile of the population) spend 1-14th of the sum spent by the richest decile, the Persian daily Donya-e-Eqtesad reported.

One way of measuring inequality is the Gini coefficient, named after Italian statistician Corrado Gini. It aggregates the gaps between people’s incomes into a single measure. A Gini coefficient of zero means everyone has the same income while one means all income goes to one person, Financial Tribune reported.

The level of inequality differs widely across the world. Emerging economies are more unequal than rich ones.

Scandinavian countries have the smallest income disparities, with a Gini coefficient for disposable income of around 0.25. At the other end of the spectrum, the world’s most unequal country, South Africa, registers Ginis of around 0.6.

It is noteworthy that because of the way the scale is constructed, a modest-sounding difference in the Gini ratio implies a big difference in inequality.

Iran has registered a Gini coefficient of around 0.4 in recent years, despite improvements to 0.35 it made in late 2000s.

Iran’s Gini coefficient is nearly equal to that of the United States. America’s Gini for disposable income is up by almost 30% since 1980, to 0.39. Wealth inequality in Iran can be blamed on low efficiency of public spending and revenues.

Ineffective Taxation, Welfare System

With oil revenues at their disposal, Iranian governments have failed to build an integrated, workable system capable of generating revenues from taxing the rich. Low tax rate or tax exemptions for some economic sectors as well as high levels of tax evasion are significant hurdles in the way of taxation in Iran.

There are also serious shortcomings in the expenditure of taxpayers’ money, which reinforce inequality. The welfare system of the country cannot identify the target group of its services due to the lack of a comprehensive data collection method.

Welfare programs in Iran include almost every member of the society, which virtually leaves inequality intact.

Take the example of the cash subsidy program. As part of the so-called Subsidy Reform Plan, the former government removed food and energy subsidies in 2010 and paid 455,000 rials ($9.8) to each and every Iranian on a monthly basis.

The controversial plan has been retained by the current administration. Nearly 76 million or 95.21% of Iranians currently receive the monthly grant of cash subsidies. An individual belonging to high-income deciles also receives the same amount as the poorest in the society.

The same inefficiency is noticeable in the country’s healthcare insurance system. More than 40% of Iranians in top high-income decile have free health coverage, whereas coverage for the bottommost decile of income distribution stands at 84%.

The share of free pension insurance is higher for the top deciles; 16% of the top eighth, ninth and 10th deciles have free pension insurance against only 6% of the lowest decile.

In a tragicomic turn of events, 2% of the richest urban households (10th decile) receive aid from charity organizations compared with 17% of the low-income lowest decile population.

One might cite these paradoxes as the reasons behind the 14-fold difference in the expenditure of the first and 10th deciles in Iran, which indicates that the quality of life for the households belonging to the top decile is 14 times better than that of the lowest decile.

This is while the ratio is less than seven for Germany, France, the Netherlands, Denmark, Norway and Sweden.

The Egalitarian Way

Switching from corporate tax to income tax, curbing tax evasion, implementing a progressive taxation system and redistribution of wealth based on the gap between the poverty line and income are significant policies adopted by these countries to advance their welfare programs.

These countries have based their taxation system on household income tax rather than corporate or companies tax. Income tax constitutes more than 50% of these countries’ government tax revenues.

For instance, the share of income tax on households in Germany’s tax revenues is 64%. Conversely, corporate tax accounts for less than 5% of tax revenues there. In other words, consumers bear the burden of tax.

In Iran, tax on jobs and companies amount to around 50% while there is no such thing as tax on household’s overall income.

Corporate tax is only imposed with the aim of transparency in Scandinavian countries. There, the governments do not view corporate tax as a source of revenues.

Tax evasion is enormously high in Iran, accounting for 30-40% of total tax revenues collected annually, Iranian officials say.

In the last fiscal year (March 2016-17), 49% of employees belonging to the first decile (low-income population) paid tax versus 92% of the employees of the 10th decile (the top high-income).

In the meantime, only 6% of self-employed people and one-fifth of those who fell in the 10th wealthiest decile paid their fair share of tax last year.

Scandinavian countries have managed to reduce tax evasion by enforcing free access to information about individuals’ level of income and by devising an income tax system that is not solely based on self-assessment.

Tax assessors in these countries can easily avail themselves of information concerning taxpayers’ bank accounts, financial transactions, etc.

Egalitarians also base their taxation system on progressive taxation, based on which the tax rate increases as the taxable amount increases. The term “progressive” refers to the way the tax rate progresses from low to high, with the result that a taxpayer’s average tax rate is less than the person’s marginal tax rate.

The marginal tax rate in Germany, France, the Netherlands, Denmark, Norway and Sweden is between 60 and 73%, whereas the rate in Iran is only 25%.

Progressive taxes are imposed to reduce the tax burden on people with a lower ability to pay, shifting the ratio for those with a higher ability to pay.

According to official figures, public employees of the first decile (poorest) in Iran pay 11% of their income in taxes, while those in the private sector who belong to the 10th decile (top high-income people) pay 5% of their income in taxes.

Allocation of aid in developed countries is based on the gap between the poverty line and the income of households. A same amount of financial aid might lift those in the third decile to the fourth decile, but may do no good for those at the bottom of income distribution; they will see no improvement in their lives and remain below the poverty line if the aid is not adjusted to the poverty threshold.

The fiscal 2007-8 was the last year the government made an official announcement on poverty line i.e. 6.5 million rials ($137) a month. This is while Chairman of Imam Khomeini Relief Committee Parviz Fattah put the poverty threshold at 8.2 million rials ($174.4) last March, saying 11 million Iranians are living in poverty.

Given the fact that the implementation of above-mentioned policies is not possible in the short run, the study urges the government to reduce energy subsides and allow prices of goods and services to rise. The revenues gained out of this economic reform could be redistributed among the poor to eradicate poverty.