Iran Pulse

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

Article Summary
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.

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.

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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.

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Found in: Economy and trade

Navid Kalhor holds an MSc in finance from Azad University and earned a BA and MA in English literature from Allameh Tabataba’i University. He has worked in the Iran Mercantile Exchange and the Tehran Stock Exchange as a trader and equity research analyst for different brokerage firms. On Twitter: @navid_kalhor

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