Assessing the Iranian Fiscal Sustainability in Past and Future through Tax Side of the Economy

Abstract n this paper, I have focused on the tax side of the fiscal policy to investigate the past and future behavior of fiscal sustainability in Iran. To do so, I have employed two different forward-looking and backward-looking approaches. First, the backward-looking approach is the fiscal policy rule proposed by Daving & Leeper (2011). Precisely, this rule determines that whether the fiscal policy is active (unsustainable) or passive (sustainable). To estimate the fiscal policy rule, I have exploited Markov switching model (MSM) which examines the tax rate response to debt dynamics under multiple regimes. Second, the forward-looking approach is the modified Blanchard’s tax gap indicator (1990) for an oil-producing country. In fact, this indicator predicts the amount of tax adjustment required to stabilize the future amount of government’s debt back to its value in a particular base year. I have used time series data over the period spanning from 1993(Q1) to 2013(Q4).