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IRAN: Bazaar strike triumphs as government retreats from tax hike

July 7, 2010 |  9:18 am

After just one day of protests, the Iranian government has retreated from its proposed 70% hike in the income tax for merchants and traders in bazaars.

On Tuesday, gold and jewelry vendors shut down Tehran's old bazaar in protest of the government's proposed tax hike. The discontent spread throughout the typically bustling bazaar as all garment, cloth and women's chador vendors slammed down their shutters and continued the strike.

Local merchants said that they did not trust the government and tax office and are already hard hit by the economy. Amir, a garment vendor, keeps a wad of bounced checks in the drawer of a table in his stall.

"Many of my clients who used to buy large quantities of garments can no longer pay their installments," he said. "Last month, I received more than [$40,000] in bounced checks. I cannot get my money back, so how can I afford to pay 70% more in taxes?"

A carpet vendor said, "The carpet business is already on the verge of collapse. So a 70% annual tax is like holding the business at gunpoint."

On Wednesday, the merchants triumphed after their meeting with Finance Ministry officials. The income tax will stay at the 2008 rate, hovering between 6% and 15%. Had the proposed raise been accepted, it would have generated $20 billion in additional government revenue.

Local reports indicate that security and intelligence services harangued the merchants for their refusal to stay open. Yet the vendors remained steadfast, arguing that the income tax hike fails to acknowledge the realities of the feeble Iranian economy.

The ailing economy threatens the government with flash points for social unrest and political chaos. Issues such as high unemployment and inflation, coupled with recent talk about slashing subsidies, rile Iranians throughout the country.

Yet the state is strapped for cash and struggles with how to address these economic exigencies. The price of oil has dropped 10% over the past three months, damaging economic growth and foreign exchange earnings.

Major macroeconomic indicators point to a flat-lining economy, or at least one in critical condition. Despite official unemployment figures of 4.7 million, independent sources suggest that the actual figure is far higher. After accounting for educated housewives, youth serving their military conscription and some university graduates who will realistically fail to find work, one analyst said, unemployment may be pegged as high as 12% of the working-age population.

Economist Fereidoun Khavand said Iran’s central bank had not reported the official growth rate since 2008. However, insiders from the regime claimed that growth was as dismal as half a percentage point in 2008 and 1.5% in 2009. Developing countries should instead, he continued, reach sustainable rates of 5%.

Inflation poses yet another point for social discontent. On Saturday, Central Bank Governor Mahmoud Bahmani said inflation had dropped to 9.4% last month, down from 9.9% in May but still a dangerously high figure.

Finally, much of the population depends on the government's subsidies, which cover basic items such as milk, bread, electricity and medicine. Energy subsidies alone cost the state up to $100 billion a year, cannibalizing the economy.

President Mahmoud Ahmadinejad has proposed cuts in subsidies but lacks the political capital to do away with them. On Tuesday he announced that all energy subsidies would be phased out by March 2015, a move that many economists have criticized as inflationary. And incendiary as well.

Historically, merchants wielded significant political power from their economic clout. Their protests played an integral role in supporting the 1979 Islamic Revolution that overthrew the Shah. More recently, the government retreated from a proposed 3% value-added tax in October 2008, surrendering to the boisterous bazaaris as closed vendors have been harbingers of violent public demonstrations in the past.

A local businessman, Hasan, wandering through the old bazaar, said: "Two years ago we protested and the government retreated. There is a proverb in Persian, 'Pretend you want to kill, then your opponent will claim he has a fever.' "

Analysts say last year's contested presidential election still appears to haunt the regime and splinter the country. Now might not be the safest time to raise taxes.

All kinds of Iranian markets seem to be teeming with confusion and frustration. 

City officials have attempted to shut down flea markets in Tehran since last week. In Shahr-e-Ray, a low-income neighborhood in south Tehran, officers and mostly female vendors scuffled when the officers insisted that they shut down their flea market, but the vendors refused to leave. Eventually, the vendors spread their goods out on the ground and sold them from dawn until midnight, ignoring the officers' threats.

Two decades ago, Iranian housewives began selling their homemade pickles and handicrafts at these popular local flea markets. As the number of jobless has risen, more people have flocked to the flea markets, sometimes held in public parking garages. Vendors also include the country's one million Afghan refugees. 

Analysts say officials fear the mere idea of gathering crowds in any context, and healing the economy will have to wait.

-- Becky Lee Katz in Beirut and Ramin Mostaghim in Tehran

Video: Locals wander through the old bazaar of Tehran to find that every vendor has gone on strike in protest of a proposed income tax hike. Credit: YouTube

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