The Impact of Taxing the Interest on Savings on the Economic Variables in Iran: A DSGE Approach

Document Type : Research Paper

Authors

1 PhD candidate, Department of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran

2 Associate Professor, Department of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran

3 Assistant Professor, Department of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran

Abstract

Introduction: Reducing dependence on oil revenues and financing government expenditures from tax revenues have always been emphasized in the country's development plans. Increasing the role of taxes in financing the government budget, as a stable source, is one of the government's concerns. This has been evident in the development plans, especially since the Third Economic Development Plan. The dependence of the budgets of oil-exporting countries on revenues from the oil export can have devastating effects on the economies of these countries such that a significant part of government revenues is subject to high fluctuations which are later transferred to government spending as a tool of fiscal policy. Fiscal instability of the government causes instability in essential public sector expenditures, which undermines the long-run growth. The existence of financial stability is a key to achieving macroeconomic stability/ It enables the continuation of expenditures related to public goods needed to lay the grounds for economic activities that ensure long-run economic growth. However, tax income is the most appropriate type of government revenue, and the higher the share of taxes in government spending, the less economic impact it will have. Compensation for the reduction of tax revenues due to exemptions causes the government budget to become more dependent on oil export revenues, which can have harmful effects for the country. The corrective approaches in tax laws with the aim of increasing tax revenues can be the introduction of a new tax base with two methods: reducing tax rates and increasing the base. One of the tax exemptions granted in the Iranian tax system relates to the income from the interests on saving accounts and bank deposits. In this study, the impact of bank interest taxes on economic variables is investigated. So far, several domestic studies have been conducted in this field.  The model used in this research follows Boscá et al. (2019) and Gerali et al. (2010), but it is adapted to the conditions of the Iranian economy.
Methodology: The impact of tax on bank interests on economic variables in Iran can have many positive and negative economic effects. Therefore, in this study, the impact of tax on income interest on macroeconomic variables is investigated. Given that this tax is imposed for the first time on the Iranian economy with no historical data, its effects can be examined in the framework of a dynamic stochastic equilibrium model. The innovation of this research is to generalize the analytical framework of dynamic stochastic general equilibrium models according to the economic characteristics of an oil-exporting country, including households, firms, banks, government and central bank. For this purpose, the model has been designed in accordance with the conditions of Iran's economy. The objective functions and constraints of each of these economic agents are introduced, optimized and used from the first-order conditions, a set of economic relations is extracted, and then the model is simulated by determining its initial values ​​ and calibrating the parameters. To evaluate the model, the moments of a number of endogenous variables of the model are compared with the real-world moments, which results in relative success in simulating the variables in the Iranian economy. Finally, the reactions of the variables to the tax on interests are examined.
Results and Discussion: The results show that, by taxing on the interest income of households, household’s consumption, national employment and production increases. On the other hand, the power of the bank’s loan payment decreases and, consequently, the borrowing by the banks from the central bank increases (in order to compensate for the lost resources). Also, by imposing a tax on interests, the demand for facilities and, consequently, the total payment facilities of commercial banks and the Ricardian household’s deposits in the bank are reduced, which leads to the reduction of the total power of banks to give loans. In addition, with the increase of facilities to firms and the reduction in the payment of loans to the Ricardian household, the composition of commercial bank assets will change.
Conclusion: In countries with economic instability, the imposition of a tax on interests can lead to the withdrawal of financial resources from banks and their investment in non-productive economic activities, thus causing more instability in the economy. The first recommendation in this regard is that, before imposing such a tax, it is necessary to stabilize the economy. In addition, to measuring the effects of the tax on the interests of bank deposits on economic variables, the efficiency of the budget and the efficiency of the banks to direct the deposits to production and investment become particularly important. The results suggest that the allocation of resources by the banks should be more efficient, because the reduction in the amount of deposits may result in inefficient allocation of resources.

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References

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The Journal of Economic Policy
Volume 14, Issue 27
September 2022
Pages 371-414

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