Targeted subsidies plan affects income distribution and poverty through several channels. On most of the analyzies, changes on labor supply are not considered. Increasing nominal income alone after paying cash subsidy rule can reduce labor supply in targeted subsidies. This issue may decrease effect of targeted subsidies. In this research by CGE we calculate the result of impact of energy price increase and direct cash subsidy transfer with considering labor supply decrease in the first phase of this plan. Then we use this CGE data to calculate the poverty index and income distribution. The model is calibrated based on 2001 Micro Consistent Matrix (MCM) designed by Research Institute of Planning and Management Deputy Strategic Planning and Control. The results of the model show that while the plan reduce supply of labor, it improve income distribution and poverty in Iran. The results also reveal that the percentage of improvement in purchasing power of rural deciles is more than the percentage of improvement in purchasing power of urban deciles.