Iran has been experiencing quite a bit of disorder recently. The reasons for this are “complicated” – Iran has many foreign enemies, and the situation smells like an attempted “color revolution” – but the government of Iran has also been making quite a mess of things all by itself, recently and for a long time now. It’s no surprise that even the most patriotic Iranians might be very dissatisfied today.
TEHRAN, IRAN – JANUARY 8: People gather during protest on January 8, 2026 in Tehran, Iran. Demonstrations have been ongoing since December, triggered by soaring inflation and the collapse of the rial, and have expanded into broader demands for political change. (Photo by Anonymous/Getty Images)
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The reasons for this, as promoted on social media, are supposedly the “Islamists,” although Iran has been Islamic since the seventh century. The more likely reason is that Iran is also suffering a moderate hyperinflation, while also raising already-high taxes to intolerable levels.
Iran’s currency, the rial, used to be fairly reliable. In 2003, it was about 8,000 rials to the dollar; and in 2011, it was about 10,000. A little slippage, but nothing too bad. But soon afterwards, the rial broke down. By 2019, it took 42,000 rials to buy a dollar. Then capital controls put foreign exchange on lockdown. In early 2026, it reportedly takes over 1.4 million rials to buy a dollar on the black market. Today’s rial is worth only about 1/140th of what it was worth in 2011.
According to the Iranian website Bonbast.com, the black market rate has moved from 800,000 to 1,400,000 (+75%) just since June 2025. The official “inflation rate” was 42.5% in December 2025, from a year earlier – but even this is considered a whitewashed government fiction.
If I was an Iranian citizen, I would be rather unhappy about this. But it gets worse.
The extreme inflation no doubt arises from Iran’s budget deficit of 5.5% of GDP in 2025, continuing a long series of deficits. Naturally, the government wants to resolve this, with higher taxes. Recent proposals include an increase in tariffs by 85%, an increase in the VAT from 10% recently to 12%; and the removal of an inflation adjustment to capital gains, making inflationary nominal increases partly taxable (a big deal when even the fake official CPI is over 40% per annum, and the currency is worth 1/140th of what it was worth only a little while ago).
This continues a long series of tax increases in Iran. The VAT, to take one example, was first introduced to replace a variety of indirect taxes, in 2008 at a rate of 3%. In 2011, it was increased to 9% (when the currency broke down). A Health Levy was added, raising the effective rate to 10%.
The standard corporate tax rate is 25%. The top personal income tax rate of 30% is not so high, but this level was hit at an income of 4,200 million rials in 2024, which at the time was about $5,250, and at today’s exchange rates, about $3000. Then, there is a Payroll Tax of a combined 30%.
That would be a terrible burden by any standard. But the amazing thing is, this tax system apparently produces revenue of only 4.9% of GDP!
In other words, it is completely dysfunctional. Nobody is paying those taxes. So the government runs a big deficit – even though it is not actually spending that much money. And to fund the big deficit, it prints money, leading to hyperinflation.
Yeah, I would be a little unhappy about that too.
But, there are some silver linings to this story. Since the present situation is completely intolerable, we can make radical changes. The political time is right. Because the present tax system generates hardly any revenue, we do not have to worry about revenue much. If our new tax system generated only 10% of GDP in revenue, that would be a huge improvement. If GDP also quickly rose by 100% – as a result of stabilizing the currency, ending hyperinflation, and introducing much lower taxes – then effective tax revenue would about triple. Three times more revenue, with much lower tax rates.
In fact many governments have recently done just this, so we know how to do it. Between 1994 and 2008, more than a dozen governments in the former Soviet sphere, including Estonia, Bulgaria, Kazakhstan, Ukraine and others, suffered terrible hyperinflation. They had also adopted Western European norms in taxation, with results much like Iran today. The combination of hyperinflation and high taxes was economic disaster. The solution was currency stabilization, and also, the introduction of much lower taxes, mostly on the Flat Tax model proposed by presidential candidate Steve Forbes and other leaders of the time, including Jack Kemp and Dick Armey.
Estonia led the way, ending hyperinflation by fixing the value of the currency to the German mark (later euro) using a currency board system in 1994. Estonia also threw out Western norms in taxes, and introduced a Flat income tax. The 24% rate seemed radically low at the time. Later governments went even further, with Bulgaria replacing its income tax system, which had a top 50% rate, eventually with a 10% Flat Tax. (You can read about Bulgaria’s adventures in my 2019 book The Magic Formula.)
But, that is not what I recommend for Iran today. Rather, I suggest the complete elimination of all income taxes in Iran, leaving only the 10% VAT. Also, payroll taxes should be reduced to no more than 10%. I would probably phase these out entirely, over time. These two taxes, with a combination of tariff and other revenue, should easily generate 10% of GDP in tax revenue. Iran would have no income taxes – much like super-successful Dubai. (Dubai introduced a 9% corporate tax rate in 2023, which doesn’t look like a good idea to me.)
Iranians understand that the government needs some money to function, and paying a 10% VAT is not the sort of thing that you would become a criminal to avoid. They would willingly pay the modest taxes. With basically just one tax to enforce, the tax authorities can easily focus their attention on rigorous administration.
Now that the Iranian rial is basically confetti, we can do anything we like regarding the currency. Estonia and Bulgaria replaced their hyperinflationary currencies with currencies fixed to the German mark. This made sense, since they are in Germany’s European neighborhood. But, I don’t think that Iran wants to become beholden to the European Central Bank. Iran would naturally want some kind of entirely sovereign solution, subordinate to nobody.
The obvious solution is gold. Iran has a long history of gold-based money. The Persian Daric was one of the premier gold coinages of the Ancient World. Later, the Gold Dinar was the coin of the realm, during the Golden Years of Saracen civilization. To take a more recent example, when Germany ended its hyperinflation in 1923, the rentenmark and later reichsmark were fixed to gold.
To do this, Iran needs to go “cash only.” The government does not spend money unless it receives it first, as tax revenue. Then, there is no pressure on a central bank to issue currency to fund the government. This is how Germany and Japan ended hyperinflation in 1949. The tripling of tax revenue that is likely to follow a major tax reform, and currency stabilization, would soon resolve spending needs.
When the People Get Rich, the Government Gets Rich Too. Guess how much better off the Iranian people will be when all income taxes are eliminated. A lot better off.
Guess which government might then become very, very popular.
Source: https://www.forbes.com/sites/nathanlewis/2026/01/15/how-to-save-iran-1-2-3/
