Iran’s Gini Index Sees 2.08% Growth

EghtesadOnline: Iran’s Gini index was at 0.3981 in the last fiscal year (March 2017-18), indicating a 2.08% rise compared with the year before (March 2016-17), Fars News Agency cited a report by Plan and Budget Organization as saying.

News ID: ۷۴۶۴۳۶

07 January 2019

The Gini index for Iran's urban areas increased by 1.69% last year to reach 0.3793, while rural areas saw their Gini index rise by 5.86% to hit 0.3559 for the same period.

As per the Sixth Five-Year Development Plan (2017-22), the Gini index is stipulated to drop to 0.34 by the end of the fiscal 2021-22.

The Gini coefficient ranks the income inequality in a place on a scale from zero—no inequality—to 1, maximum inequality. In other words, the closer the number is to 1, the more wealth is concentrated in the hands of fewer people, thus the bigger income disparity, according to Financial Tribune.

One way of measuring inequality is the Gini coefficient, developed by Italian statistician Corrado Gini in 1912. It aggregates the gaps between people’s incomes into a single measure. A Gini coefficient of zero means everyone has the same income while 1 means all income goes to one person.

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.

Because of the way the scale is constructed, a modest-sounding difference in the Gini ratio implies a big difference in inequality.

PBO Recommendations

Plan and Budget Organization recommends policymakers take into consideration the following issues to reduce income disparity in the country:

- Lending support to social, non-governmental funds to reduce poverty and improve poor people’s standards of living,

- Providing food security, improving people’s nutrition and reducing diseases related to malnutrition by providing them with the basket of essential commodities,

- Increasing poor people’s income level,

- Eliminating high-income households' cash subsidies,

- Regulating monetary, financial and foreign currency market policies in order to check inflation and safeguard the value of local currency to prevent a decline in people’s purchasing power,

- Expanding social support, including social security, unemployment insurance, providing subsistence income (the minimum income a household requires to sustainably provide its needy members with a modest standard of living),

- Improving the business environment to create economic growth and new job opportunities,

- Expanding health care services for the poor,

- Improving the income of poor people by providing them access to productive assets (small enterprises credit projects), and

- Reducing poverty, particularly in rural areas, by improving primary skills, including literacy, education, health and the opportunity for economic and social participation.

Rich-Poor Inflation Gap at 2.4%

The statistical Center of Iran's latest report shows inflation gap between the first income decile (those with the lowest income) and the 10th decile (those with the highest income) increased 0.4% to reach 2.4% in the Iranian month Azar (Nov. 22-Dec. 21) compared with the previous month’s 2%.

The average goods and services Consumer Price Index in the 12-month period ending Dec. 21, which marks the end of the Iranian month of Azar, increased by 17.1% for the first decile whereas it rose by 19.5% for the 10th decile.

The fourth and fifth deciles saw their 12-month average inflation rate grow by 18.1% compared with last year’s corresponding period. The annual inflation rate for the second decile increased by 17.8% in Azar, 18% for the third decile, 18.2% for the sixth, 18.6% for the seventh, 18.7% for the eighth and 18.9% for the ninth decile.

The highest overall CPI (using the Iranian year to March 2017 as the base year) stood at 153.5 for the second decile, and the lowest index was 152.2 for the first decile.

The year-on-year inflation rates increased by 36.5% for the first decile, 37.9% for second and fourth, 38% for third, 37.8% for fifth, 37.7 for sixth, 38.4% for seventh and eighth, 38.6% for ninth, and 39.5% for 10th decile.

Income deciles are groupings that result from ranking either all households or all persons in the population in the ascending order according to income and then dividing the population into 10 groups, each comprising approximately 10% of the estimated population.

WEF Report

The World Economic Forum’s latest ranking of 74 emerging economies based on the Inclusive Development Index between 2012 and 2016 (using indicators available during both years) show Iran’s Net-Income Gini was at 38.8, poverty rate at 2.5%, wealth Gini at 67.3 and median income at $12.5.

The five-year trends for these dimensions show -2.5%, 2.5%, 0.5% and -0.4% changes respectively. Iran’s Net-Income Gini trend was among the top 20% emerging economies.

Net-Income Gini measures the extent to which the net distribution of income (that is, post-tax, post-transfers), among individuals or households within an economy, deviates from a perfectly equal distribution. A Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.

Poverty rate, for emerging economies, is defined as the percentage of the population living on less than $3.20 a day at 2011 international prices. For advanced economies, relative income poverty is defined as less than half of the respective median national income (after taxes and transfers, and adjusted for the size of household).

Wealth Gini measures differences in the distribution of wealth, such that higher Gini coefficients signify greater inequality in wealth distribution, with 1 signaling complete inequality and 0 complete equality.

Median income is the median of daily per capita income/consumption expenditure in 2011 purchasing power parity dollar. The data are drawn from nationally-representative household surveys, which are conducted by national statistical offices or by private agencies under the supervision of government or international agencies, and are obtained from government statistical offices and World Bank Group country departments.

The per capita income/consumption used in PovcalNet is household income/consumption expenditure divided by the household size. The report’s author has converted the data from monthly to daily median income.

The Inclusive Development Index is an annual assessment of 103 countries’ economic performance (74 emerging and 29 advanced economies) that measures how countries perform on 12 dimensions of economic progress. It has three pillars: growth and development, inclusion and intergenerational equity, which is sustainable stewardship of natural and financial resources.

Iran came in 27th in World Economic Forum’s latest ranking of 74 emerging economies based on IDI.

The index shows a 0.92% decline based on percentage change between the five years under review.

14-Fold Expenditure Gap

A research titled “Poverty Reduction Policies and Improvement of Wealth Redistribution”, presented by economist Mohammad Hosseini at the Second Conference on Iranian Economy hosted by Niavaran Research Center in mid-December 2017, showed the bottom 10% (the poorest decile of the population) spend 1-14th of the sum spent by the richest decile.

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.

The main flaw of Iran's welfare programs is that they extend equal facilities to all members of the society, which virtually leaves inequality intact.

Take the example of the cash subsidy program. As part of the 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, including many living overseas.

As a result, an individual belonging to high-income deciles receives the same amount as the poorest in the society.

The share of free pension insurance is higher for the top deciles: 16% for the top eighth, ninth and 10th deciles against only 6% for 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 poorest decile population, the Persian economic daily Donya-e-Eqtesad reported.

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.

Waiting for Tax Savior

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 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 revenue.

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

In the fiscal 2016-17, 49% of employees belonging to the first decile (low-income population) paid taxes as opposed to 92% of employees in 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.

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 as taxes.

The allocation of aid in developed countries is based on the gap between the poverty line and the income of households. The 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 pit 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.

As the implementation of above-mentioned policies is not possible in the short run, the aforementioned study urges the government to reduce energy subsidies 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.