The Effect of Oil Rent on Tax in Iran, Focusing on the Role of the Underground Economy

Abstract

Considering the underground economy and the dependence of Iran's economy on oil and the influence of the tax system on oil revenues, the present study attempts to investigate the effect of oil rent on taxes, emphasizing the role of the underground economy for the period 1973-2021 in the form symmetrical and asymmetrical model. For this purpose, the size of the underground economy was calculated using the MIMIC method, representing an average of 15.2% of Iran’s economy. Then the research model was estimated by linear (symmetric) and non-linear (asymmetric) autoregressive distributed lag. The result indicates that in the symmetrical estimation, the tax is inversely affected by the oil rent, and the increase in the size of the underground economy aggravates this negative relationship. The asymmetric estimate shows that the effect of oil rent on taxation is asymmetric. First, the effect of positive oil rent shocks on taxes is much greater (more than twice) than the effect of negative oil rent shocks. Second, the expansion of the underground economy intensifies the adverse effect of negative oil rent shocks and the positive effect of negative oil rent shocks on taxes. Accordingly, it is suggested that the economic policymaker, regardless of the ups and downs of oil and the resulting rent, should diligently work to improve the efficiency of the tax system, and attempt as much as possible to control and reduce the size of the underground economy.

Keywords

• tax
• oil rent
• underground economy
• asymmetric model
• iran.