The role of fiscal policy in fighting poverty and reducing inequality in Iran : an application of the commitment to equity (CEQ)‎ framework

Abstract EN

This paper evaluates the role of fiscal system in Iran in reducing poverty and inequality.

We employ the marginal contribution approach in which the effect of each component of the system is evaluated by comparing the current system to the counter factual of removing that component from the system.

Using the CEQ framework, we show that the fiscal system as a whole reduces inequality and poverty significantly by about 16% and 63% respectively.

We find that the main driver of this effect is the Targeted Subsidy Program (implemented in 2010) that eliminated the energy subsidies and substituted them with a nominal cash transfer to every Iranian.

We show that the effect of this program on reducing inequality and poverty is about 10% and 64% respectively.

The main reduction in poverty comes from the rural areas where this program reduces the poverty headcount index from 37% to 17% comparing to the 5% reduction in the urban areas.

Given the success of this program in reaching the bottom deciles of the income distribution and reducing inequality and poverty, we recommend that the current plans of Iranian government in eliminating the subsidy of the top deciles is combined with the allocation of some of the freed funds to the bottom deciles.