Estimating Optimal VAT Tax Rate in Iran: Approach to Diamond & Mirrlees Model



In this Article, optimal VAT rates have been calculated for the three different levels of consumption tax revenue needed by the government. Using the data of 10 income groups of the Iranian rural and urban households in the period(1378-1386) and applying Panel Data approach, the Almost Ideal Demand System(AIDS) were estimated to derive the price and income elasticities. Then, the optimal VAT rates were derived using Diamond & Mirrlees (1997) model and Marginal Social Utility Criteria. The results of the study show that, the tax rates derived for three different levels of revenue as well as for zero level of the Degree of inequality aversion are nearly equal and is about 4 percent, which in turn endorses the one rate VAT system currently operating in Iran.
Classification JEL: K34, H21, C33