An Analysis of the Effects of Tax Exemptions on Taxpayers and the Government

Abstract

Tax exemptions are widely used as fiscal policy instruments to promote economic growth, support specific sectors, and advance social justice objectives. Within Iran’s legal and economic system, exemptions have become an integral yet controversial component of taxation policy. This article examines tax exemptions as a legal–economic mechanism and critically analyzes their effects on both taxpayers and the government. The study is grounded in a doctrinal analysis of tax law combined with economic reasoning, aiming to assess whether tax exemptions in Iran achieve efficiency, equity, and fiscal sustainability. The analysis demonstrates that tax exemptions generate mixed and often contradictory outcomes. On the taxpayer side, exemptions influence perceptions of tax equity and distributive justice, shape compliance behavior, and affect investment decisions. While certain exemptions may alleviate financial pressure on individuals or encourage productive activities, many disproportionately benefit legal entities and economically powerful actors, thereby weakening horizontal and vertical equity. Complex and fragmented exemption regimes also incentivize tax avoidance and undermine long-term confidence in the tax system. From the government’s perspective, tax exemptions produce significant short-term revenue losses and contribute to long-term fiscal imbalance. Persistent erosion of the tax base constrains public budgets, complicates fiscal planning, and limits the state’s capacity to provide essential public services. Moreover, extensive and poorly coordinated exemptions weaken economic governance and reduce policy credibility, increasing vulnerability to macroeconomic instability. The findings suggest that the challenges associated with tax exemptions in Iran are systemic rather than incidental. Tax exemptions often fail not because of isolated design flaws, but due to weak legal clarity, insufficient oversight, policy fragmentation, and misalignment with development priorities. The article concludes that tax exemptions should be treated as exceptional and conditional instruments, subject to strict legal justification, transparency, and periodic evaluation. Only within a coherent legal and fiscal framework can tax exemptions contribute to public welfare without undermining equity, efficiency, and fiscal sustainability.