Iran has had a nationwide basic income in place for the past year. It was introduced in the autumn of 2010 to replace inefficient subsidies of fuel and other commodities that had been in place for decades. The basic income was designed to cushion the blow of increased prices.

After a year of operation, the government is finding it necessary to lower the cost of the basic income and is considering means testing as one option. The plan would make the highest income-earners ineligible for the transfer. The number under consideration is 10 million people, or about 14 percent of the 74 million who currently receive the transfer.

The initial transfer amount (per person) was set much too high relative to the money saved from the elimination of subsidies, although understandable from a social and (short-term) political standpoint. That mismatch wreaked havoc with the finances of the program since nearly all of the net revenues generated from price increases went to households in transfers when their share was supposed to be 50 percent according to the Targeting Subsidies Law of January 2010. The other 50 percent was supposed to be divided between government spending and the business sector, which also suffered when the fuel subsidies were eliminated. The business sector got little of the 30 percent share allocated to them, and the government got none of the 20 percent share it had been allocated for improvement of infrastructure.

There is another problem that means testing might address. Whatever the level of funds available for transfer to households, there is a tradeoff between coverage and the amount of the transfer per person. If the rich are getting it, the lower income people will have less. That is the real dilemma now. The idea is to exclude some of the better off so that the amount of the transfer can be raised for the rest. Additional revenues are also expected from further cuts in subsidies in the second stage of the reform that is slated to begin in a few months.

The initial plan is to ask higher income earners to opt out voluntarily. Households with income above a couple of thousand dollars a month (a fairly large amount of money in Iran) will receive a letter from the government urging them to withdraw from the program voluntarily. No one knows how the recipients will respond. If enough of them agree to withdraw, the matter will have been settled. If not, the government will have to decide how to proceed. The sad fact of the matter is that at the moment the funds going to the rich are entirely at the expense of those with lower income.

Hamid Tabatabai, writing for USBIG

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