Investigating the effects of a permanent tax shock on banking interest on Economic Variables in Iran: A deterministic DSGE Approach

Abstract

Taxes are considered as a stable and sustainable source of public financing of governments and policy makers which always looking to make the most of this financial tool by establishing optimal tax laws in order to achieve economic goals. On the other hand, in most of the tax systems implemented by governments in different countries, tax incentives are considered in the form of various types of tax concessions for economic agents. In Iran's tax laws, exemptions and incentives have been considered in different tax bases. One of the exemptions granted in Iran's tax system is the exemption of interest in various deposits in Iranian banks. In this paper, the effects of the tax on bank deposits interest are investigated in the form of a permanent tax on bank deposits interest in deterministic DSGE Approach. The obtained results show that with the permanent tax on bank deposits interest, if the economic agents are informed about the implementation earlier, the increase in total consumption will continue for a longer period of time and the increase in total production. Bank facilities paid to companies, investment and capital stock will also be higher and this increase will continue for a longer period of time. Therefore, it is recommended that if the economic policy makers intend to implement the tax on bank deposits interest, in order to increase the level of production and investment to a greater extent and for a longer period, the implementation of this policy should be announced to the economic agents as soon as possible.

Keywords

• deterministic dsge model
• fiscal policies
• tax on bank deposits interest