Skip to main content

Iran's poorest citizens still waiting for some semblance of parity after 39 years

Iranian authorities need to muster the courage and will to tackle fundamental tax and subsidy reforms to remedy the gaping wealth inequality in the country.
An Iranian man counts banknotes after exchanging a gold coin for cash in Tehran on January 23, 2012. Gold coins were being exchanged for over 10,000,000 rials as the Iranian currency continued to lose value against the US dollar. Top European Union diplomats are meeting in Brussels to tighten existing sanctions on Iran by banning imports of Iranian crude as well as targeting finance, petrochemicals and gold to pressure the country. AFP PHOTO/ATTA KENARE (Photo credit should read ATTA KENARE/AFP/Getty Images

When the 1979 Islamic Revolution in Iran took place, its overriding objective was social justice achieved through helping the poor and ensuring political freedom. However, after almost four decades, the income of low-wage earners nationwide has plummeted as the wealthy have grown wealthier.

Comprehensive studies of the Iranian economy show that the income gap in Iran is significantly higher than in other nations that have successfully lowered their standing on the Gini index of household wealth distribution, the most commonly used measure of inequality. A survey presented in December at the Iranian Economy Conference in Tehran showed that people who earn the most (those in the 10th decile) spend 14 times more than the most underprivileged people (those in the first decile). This conclusion was based on monthly average per capita expenditures during Iran's fiscal year that ended March 20, 2017.

Using the Gini index, the lower the score, the better the equality; zero represents absolute equality. In the past 10 years, Iran's Gini coefficient improved when it slid from a high of about 44 in 2006-07 to about 37 in 2013-14. However, Iran's index started to worsen again to just shy of 40 in the fiscal year that ended in March 2017.

The core argument that can justify the changes in the Gini index is how much people's earnings have grown compared with inflation. Since the general wage growth of the poorest segment of the population has commonly been far below inflation, when inflation rose that segment's net disposable income was destined to drop. Thus, the real rate of income growth for these people turned negative. Furthermore, when the economy shrinks due to recession, the poorest pay the highest price as they are often the first to lose their jobs.

The gap between rich and poor is partly due to inefficient revenue collection, and partly to inefficient resource allocation. This structurally derives from budgetary targets regularly based on wishful thinking by various administrations in Iran.

The Achilles' heel of generating revenues for the government is largely the inefficient tax system. Huge reliance on oil revenues to finance public spending has strained the government's ability to execute its grand schemes. For instance, immense cash windfalls from petrochemical products have led different governments in the past 40 years not to aggressively pursue collecting taxes from the wealthiest.

Additionally, tax collection is currently under pressure from two fronts. The first is age-old loopholes in taxation laws: low tax rates and large tax exemptions for lucrative segments of the economy that are mainly controlled by either the government or semi-private entities that have close links with power circles. The second, equally important front is the malfunction of the law itself. It has facilitated tax evasion for both people and legal entities, thereby blocking the rightful redistribution of wealth to those most in need of aid.

In the same vein, there are serious flaws in how the government identifies the groups suffering most from absolute poverty. This is largely due to shortcomings and flaws in gathering comprehensive data, which has ultimately culminated in widespread protectionist policies that grant subsidies to almost all Iranians. For example, in the subsidy reform plan first implemented by the administration of then-President Mahmoud Ahmadinejad in December 2010, almost all Iranians are still entitled to 455,000 rials ($12) in cash handouts on a monthly basis. The stipend was worth almost $45 when distributed in 2010. The constant devaluation of the rial combined with erroneously distributing cash transfers to each and every Iranian gradually pared away the efficacy of the original plan. Its purpose, after all, was to fill at least marginally the gap between the haves and have-nots.

Morteza Afghah, an economist who has challenged the authorities’ definition of the “national poverty line,” noted, "The unfair distribution of wealth and economic inequality is so severe that the general public cannot believe such statements [supporting the current definition of the poverty line] in any shape or form.” Afghah believes the government’s understanding of an index such as the poverty line is questionable, as government-leaning economists’ criteria are not neutral on this issue. Moreover, while independent economists estimate the poverty line for Iranian households hovers around $800 per month, officials assert it is between $160 and $215 — which is mind-boggling and contrary to real living costs. Last year, the minimum wage plus benefits equaled a monthly maximum of $380. Yet the government estimated that based on the recent consumer basket — a sampling of goods and services used to follow prices — the typical household would need at least $790 to stay above the poverty threshold. Having said that, less than half of the initial wage amount agreed to between the Ministry of Labor and employers is paid as salary to the workforce.

The findings of the survey conducted on rising inequality in Iranian society reveal guidelines on how to tackle the considerable disparities among Iranian households. Expanding the tax base, fighting tax evasion, hiking income tax rates on the rich and paying subsidies to those underprivileged groups earning well below the poverty line are among equality-enhancing measures to boost living standards for poor Iranian citizens. Nonetheless, application of all these policies is not viable in the short term. Hence, the government needs to provide the necessary resources to eliminate absolute poverty, primarily by reforming the energy subsidy: A rise in fuel prices could help finance anti-poverty policies. Also, cash subsidies should be distributed in line with the needs of the impoverished members of the society. This would enhance the potential for this social class to fully engage in society.

Join hundreds of Middle East professionals with Al-Monitor PRO.

Business and policy professionals use PRO to monitor the regional economy and improve their reports, memos and presentations. Try it for free and cancel anytime.

Free

The Middle East's Best Newsletters

Join over 50,000 readers who access our journalists dedicated newsletters, covering the top political, security, business and tech issues across the region each week.
Delivered straight to your inbox.

Free

What's included:
Our Expertise

Free newsletters available:

  • The Takeaway & Week in Review
  • Middle East Minute (AM)
  • Daily Briefing (PM)
  • Business & Tech Briefing
  • Security Briefing
  • Gulf Briefing
  • Israel Briefing
  • Palestine Briefing
  • Turkey Briefing
  • Iraq Briefing
Expert

Premium Membership

Join the Middle East's most notable experts for premium memos, trend reports, live video Q&A, and intimate in-person events, each detailing exclusive insights on business and geopolitical trends shaping the region.

$25.00 / month
billed annually

Become Member Start with 1-week free trial

We also offer team plans. Please send an email to pro.support@al-monitor.com and we'll onboard your team.

What's included:
Our Expertise AI-driven

Memos - premium analytical writing: actionable insights on markets and geopolitics.

Live Video Q&A - Hear from our top journalists and regional experts.

Special Events - Intimate in-person events with business & political VIPs.

Trend Reports - Deep dive analysis on market updates.

All premium Industry Newsletters - Monitor the Middle East's most important industries. Prioritize your target industries for weekly review:

  • Capital Markets & Private Equity
  • Venture Capital & Startups
  • Green Energy
  • Supply Chain
  • Sustainable Development
  • Leading Edge Technology
  • Oil & Gas
  • Real Estate & Construction
  • Banking

Start your PRO membership today.

Join the Middle East's top business and policy professionals to access exclusive PRO insights today.

Join Al-Monitor PRO Start with 1-week free trial