Apr 29, 2014 - 0 Comments - Data -

Budget Revenues

Just like households, governments also have a budget that negotiates revenue streams with expenditures. And taxation constitutes the most significant source of revenue for the government budget.

The Ministry of Development classifies the revenue streams of the government budget under three headings: Tax Revenues, Non-tax Revenues and Special Revenues and Funds. Non-tax Revenues is composed of revenue streams that are generated by public institutions, by institutions from which the government receives a share of income and from various fines (e.g., traffic fines, tax fines). On the other hand, Special Revenues and Funds line item refers to all the remaining revenue streams that accrue from savings, bonds and credits extended for projects.

Tax Revenues, on the other hand, are classified under four subheadings: Taxes on Income, Taxes on Wealth, Taxes on Goods and Services and Taxes on Foreign Trade. When compared with Taxes on Income and Wealth, Taxes on Goods and Services (in short, Sales Tax) tend to undermine income equality. This is the case because Taxes on Goods and Services are levied on all consumers indiscriminately, regardless of their level of income. To put it differently, in this indirect taxation mechanism, the tax rate is independent of the income level of the consumer. Technically speaking, an indirect tax scheme such as the Sales Tax, unlike Taxes on Income and Wealth, is not a form of progressive taxation—the tax rate does not increase as the income level increases or the wealth grows.

We can track the transformation of the various components of the revenue sources of Turkey’s government budget by looking at three snapshots from 1990, 2000 and 2010 (Tables 1, 2 and 3, respectively). In 1990, 42% of the government budget was financed through income-based taxes. This revenue stream declined in 2000 to 32%, and then in 2010 to 22%. In contrast, sales-based taxes, starting in 1990 with 25% of the overall revenues, increased in 2000 to 34%, and in 2010 to 44%. The remaining revenue items did not change significantly, but this particular change of emphasis from direct (Income and Wealth) to indirect (Sales) taxation is in itself quite remarkable.

Many economists who study Turkey note that informal sector constitutes a significant portion of the country’s economic activities. Since it is impossible to tax income generated through informal economic activities, the government of Turkey has chosen to raise tax revenues through sales taxes. The transformation of the composition of the revenue streams from an emphasis on direct (Income and Wealth) forms of taxation to indirect (Sales) forms indicates that the government, in order to diminish its budget deficit has chosen the easier route—even though it has the undesirable consequence of increasing income inequality.

Table 1

Table 2

Table 3

Sources:

Dataset is downloaded from the Ministry of Development website, “Economic and Social Indicators” link.

Statistical Table: “Public Finance (Table V.)”

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