Abstract:
Laffer curve indicates relationship between tax rate and tax income. The aim of this paper is estimating of laffer curve in Iranian economy. To do so, we have used threshold regression method. Empirical results indicate that since the tax rate is low (the threshold value is less than 0.0848) in two-regime model, tax rate and tax income have a significant positive relationship, but when the tax rate is high (the threshold value is larger than 0.0848), tax rate and tax income have a significant negative relationship.
Machine summary:
In economics, the Laffer curve is a representation of the relationship between possible rates of taxation and the resulting levels of government revenue [Tucker (2010)].
There are many studies about laffer curve in developed countries in recent years such as Dahlby and Ferede (2011), Kuo (2012), Laffer (2012), Francesco (2012), Ihori and Yang (2012), Gross (2012), Berman and Milanes-Reyes (2013), Tsuchiya (2013), Usher (2013), Burian & Brčák (2013) and Creedy and Gemmell (2014), but there are lack studies about laffer curve in Iran.
Jafari Samimi, Nademi and Zobeiri (2010) estimated the rate and effect of threshold tax on economic growth in Iran during 1980 -2008.
Jafari Samimi, Nademi and Zobeiri (2010) applied a two-sector production function developed by Ram (1986) to estimate the threshold regression model for Islamic countries, regarding the effect of government size on economic growth.
Holter, Krueger & Stepanchuk (2014) have studied the importance of household heterogeneity and the progressivity of the labor income tax schedule for the ability of the government to generate tax revenues.
We have used the following model based on Laffer curve: TaxIncomet = b0 + b1GNPt + b2TaxRatet + et (1) Regression (1) shows that the variables which affect on real tax income including the real GNP and tax rate.
4. Empirical Results This paper uses Hansen (1996, 2000) threshold regression model to study whether a non-linear Laffer curve exists in Iran.
Thus, we can make sure that the non-linear situation of the Laffer curve exists in Iran when "tax rate" is the threshold variable.