Taxing Iran

President Mahmoud Ahmadinejad has presented the clerical establishment with a taxing dillema

Reforming the economy has been a key objective of Iran’s government since President Ahmadinejad’s troubled reelection in 2009. For example, despite widespread objections, Ahmadinejad took the bold step of reducing state subsidies in an attempt to simultaneously rationalise the economy and disenfranchise his middle-class critics, and promising more targeted subsidies for the lower classes that support his government.

Arguably, the international community ought to be thanked for imposing sanctions on Iran since sanctions seem to have generated a new pragmatism towards economic liberalization, by galvanizing support for previously 'unattainable’ economic reforms. Following the imposition of a series of new sanctions since 2010, Ahmadinejad has now turned his attention to Iran's taxation system. Speaking at a conference on tax reforms on December 3, he claimed that paying tax is not "forced payment"; instead, it is the most important form of "participation in politics".

[inset_left]Ahmadinejad and his team must find a way to assure the public that their tax money will be spent on programmes that directly improve their day-to-day quality of life[/inset_left]Traditionally, revenues generated from oil export had made the government reluctant to collect taxes, let alone reform the system. However, as more oil companies depart Iran and more states refuse to buy Iranian oil, Tehran is increasingly in need of new sources of income. The government seems determined to implement painful tax reforms to increase revenue. This new enthusiasm could also be a tactical move by the Ahmadinejad government to reduce the financial might of the Revolutionary Guards (IGRC) whose smuggling activities tend to deprive the state of $20 billion in annual tax revenues. Indeed, in a recent speech on key obstacles to tax reform in Iran, Ahmadinejad included the Guards, referring to them as "our smuggler brothers".

Regardless of the government's motives and intentions, overhauling the taxation system will not be a straightforward process, although it is long overdue. Not only are 41 percent of Iranians legally exempted from taxation, but a significant portion of regime officials – and not only the IRGC - have a vested interest in keeping the current system unchanged so to  continue their illegal economic activities. Moreover, as recent anti-tax protests in Tehran's textile and gold markets illustrate, government still has a long way to go persuading business owners to actually pay into the public purse. What is more, Ahmadinejad and his team must find a way to assure the public that their tax money will be spent on programmes that directly improve their day-to-day quality of life. In the face of recent financial scandals as well as widely held views about government's corrupt tendencies, however, government chances of persuading the public are slim at best.

More importantly though, there is a cultural factor at play. It is no exaggeration to say that tax evasion in Iran, as with Greece, is a national sport. The  important difference with Greece, however, is that the vast majority of Iranians are encouraged to avoid paying taxes by the clergy class because it is said to be haraam. Unlike their Sunni counterparts, Shia marjas receive their incomes directly from the public which are paid to them, or their representatives, in the form of khoms (poor tax). This in turn explains why Shia Islam and Shia clerics have been more political compared to Sunnis. Whereas Sunni clerics depend on the state for their income and survival, Shia marjas have the economic means to act independently from the state, and can undermine the state by using their financial independence to set up welfare states in their respective regions and districts.

As a matter of fact, Ayatollah Khomeini and his fellow mullahs' incredible success in securing the public and the bazaar support for their revolution had a lot to do with their economic independency from the Shah. They had the financial means to mobilize the public and compensate those who gave up their jobs to protests on streets and spread Khomeini's cause. At the same time, preferring the rather informal khoms system to a state-regulated tax system in which they had to register their national incomes, many Iranian merchants may have lent their backing to Khomeini and the revolution out of financial calculations – paying less tax and retaining a larger portion of their annual incomes – rather than pure ideological affinity.

As Ahmadinejad's team moves forward with its tax reform agenda, it is creating a puzzling dilemma for the clergy class, who, arguably, constitutes the biggest obstacle to implementing the proposed reforms. Aware of the state's urgent income needs, many clerics realize they ought to encourage their followers to pay tax. Yet, doing so would mean a drastic reduction in the Ayatollah’s own source of income, as it would be difficult to ask the public to pay both state taxes and khoms, especially in this period of economic hardship. Opting for the latter requires the clergy class to prioritize the government’s interest over its own. The trouble here is that they do not know the real intention of the President: is he acting in the regime’s interest by trying to put in place a new taxation system to improve government revenue, or is he trying to weaken the clergy class by depriving them of their source of income and thus their independence from the state?

An earlier version of this article was first published as a blog in the Inside Out section of The Majalla

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