Minister Şimşek stated that if a tax rebate was to be launched, the first step would be to cut taxes on employment.

I did not listen to Minister of Finance Mehmet Şimşek on tax rates; but I saw the headlines of his statements in the news. As far as I understood, he stated that if a tax rebate was to be launched, the first step would be to cut taxes on employment, followed by communication taxes.

I guess, the reason why taxes came to the fore in the economic agenda is the recent hike in gas and diesel fuel prices. The hikes brought about rightful criticisms. For example, Chairman of Kayseri Chamber of Industry, Mustafa Boydak, criticized during Uludağ Economics Summit that domestic transportation costs were extremely high in Turkey. He stressed that cost of transporting goods from Kayseri to the Mersin Port was almost 70 percent of that from Mersin to China.

As Mr. Şimşek also stated, the tax imposed on gas and diesel fuel did not change for the last few years. As the price of crude oil and exchange rates increase, however, so do the prices of gas and diesel fuel. The tax rates are constant, but the tax amount rises as the basis of tax increases. In the end, prices of gas and diesel fuel climb up along with the hike in the price of crude oil as well as the rise in the exchange rate. 

Comparisons

The areas which Mr. Şimşek emphasized as priorities of a possible tax rebate are critically important. So are transportation costs. It is a technical process to decide which tax harms the economy more when raised to high degrees. On the other hand, it is a political decision which tax areas should be the priority of reform attempts. Though they are highly important, the issue of priorities is not the subject of today’s commentary. At the end of the day, all of the above remarks reveal that the tax system of Turkey suffers from severe problems. I think it will be useful to recall a comparison, which I have referred to frequently before.

In 2009, tax revenue in proportion to GDP for individual OECD countries had an average value of 33.8 percent. The ratio for Turkey was 24.6 percent. 2009 was the year of crisis. But if we take another year, the result does not change. In 2005, for example, the ratios stood at 35 percent in OECD and 24.3 percent in Turkey. The comparison between Turkey and a peer country also gives a similar result.

For example, the Report on the Turkish Economy, an import report which the Undersecretary of Treasury prepares and updates on a weekly basis, compares tax revenue of Turkey with the OECD average as well as with a group of peer countries, called the “comparison group.” The group involves Mexico, Korea, Czech Republic, Greece, Hungary, Ireland, Poland, Slovakia and Spain. Turkey’s tax revenues are low compared to these, as well.

Promising

We all know that tax revenues are low not because tax rates are low. The problem is that the system fails to collect taxes from a remarkably big group of taxpayers. This implies a severe challenge. With a different perspective, however, this is promising for at least two reasons: first is that, if Turkey can achieve to reduce the size of the informal economy even slightly, it will generate additional revenue which can be allocated to other areas of spending, for instance, to improve the infrastructure quality. Second, if Turkey can lower the size of informal economy, it can create a space to reduce tax rates, which would create a more conducive investment climate. Actually, the Undersecretariat of Treasury presents the comparison on tax revenues under the title “investment climate” and draws the attention of foreign investors to the fact that tax on income and profits in Turkey are low compared to rival countries.

This commentary was published in Radikal daily on 24.03.2012