Starting with late 1990s, the composition of tax revenues of Turkey has transformed significantly, beginning to rely increasingly on indirect taxes.
Tax revenues constitute a significant share of budget revenues. However, due to its impact on income distribution, one should pay attention to how tax revenues are collected. As noted before (Budget Revenues), when compared with direct taxes (e.g., Taxes on Income and on Wealth), indirect taxes (e.g., Taxes on Goods and Services or on Foreign Trade) 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 form of indirect taxation mechanism, the tax rate is independent of the income level of the consumer. Technically speaking, indirect taxes like the Taxes on Goods and Services, unlike Taxes on Income or on Wealth, are not a form of progressive taxation—the tax rate does not increase as the income level or the wealth increases.
As noted frequently, since the late 1990s, the budget revenues of Turkey relies predominantly on indirect taxes. In Table 1, we observe the composition of different streams of tax revenues as a proportion of the overall budget revenues from 1975 to 2010. Until 1995 direct taxes in the form of Taxes on Income and on Wealth constituted on average 44.7% of the overall budget revenues. From 1995 to 2010, this proportion has dropped to 28.5% on average. Throughout the entire period Taxes on Wealth remained on average 1.2%. This means that those who own wealth (e.g., estates, stocks, bonds) are not taxed in any significant way—unfortunately Turkey is not an exception.
In Table 2, we focus on the Taxes on Goods and Services as well as on Income as a proportion to the overall GDP. This series shows that as the proportion of Taxes on Income to the GDP remained relatively stable throughout the period (hovering around 5% of GDP), the proportion of Taxes on Goods and Services to the GDP has increased from 3% on average between 1975 and 1995 to 8% on average between 1995 and 2010.
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 direct to indirect taxes indicates that the government, in order to diminish its budget deficit has chosen the easier route—even though this route has the undesirable consequence of increasing income inequality.
Sources:
Dataset is downloaded f rom the Ministry of Development website, “Economic and Social Indicators” link.
Statistical Table: “Public Finance (Table V.)”
