Can Şimşek collect taxes despite capital and religious sects?

From time to time, you hear true or partially true words from people you would never expect. The words spoken are true, but they have no validity (no real weight). The latest example is the statements made by Minister of Finance Mehmet Şimşek. Here is what he said:

“With the strengthening of the teams, there will be a permanent Finance presence at the entrances and exits of organized industrial zones and wholesale markets. Not just occasionally, but permanently. Furthermore, there will be tax officials at the entrances and exits of major cities and on their main arteries.... We need to increase direct taxes and reduce the share of indirect ones. We should not do this by increasing tax rates; we must do it entirely by fighting against informality, and we are determined in this regard...”

We have been suggesting what Şimşek is saying here for years. However, I also suspect that Şimşek's intention has nothing to do with the principle of a balanced budget and sound money or policies to prevent inflation. His intention is not to put a strong fiscal policy alongside monetary policy in the fight against inflation. He has only one concern or one duty: “To keep up with the never-ending expenses of the Palace and its cronies.”

First, let us state this: The fight they are waging against inflation and their statements that “Our program is working” have never been an accurate expression. The program was not working before the March 19 Ekrem İmamoğlu blow, and it is not working after it either…

We say that monetary policy alone is not enough in the fight against inflation and that fiscal policy is also necessary, but the monetary-interest rate policy they implemented was not a policy that served to prevent inflation either. To avoid digressing, I will try to explain the reason for this in a paragraph at the end of the article.

Let us come to fiscal policy… It also has two separate legs. One is that you will prevent tax loss and evasion, and the other is that you will spend the collected tax not to live in luxury and splendor or to enrich cronies, but to serve the public. You will create a balanced budget.

And of course, making a budget and making budget expenditures requires being subject to effective parliamentary, judicial, and media oversight. In a period where law and democracy are trampled upon, even if you make a balanced budget (which you cannot), you cannot speak of an effective and efficient budget or a budget that serves the nation.

THE STATE ENCOURAGES TAX LOSS AND EVASION

While Mehmet Şimşek is dealing with tax loss and evasion, I have suggestions that would increase corporate and income taxes at least 5-fold without even entering into an audit. I will suggest them, but I do not know if he has the political courage to do it.

This statement by Mehmet Şimşek is very valuable: “We need to increase direct taxes and reduce the share of indirect ones. We should not do this by increasing tax rates; we must do it entirely by fighting against informality, and we are determined in this regard...”

I have written this many times before. In Turkey, the amount of loss and evasion in Corporate Tax and Income Tax paid via declaration is 1 to 10… According to the calculation I made using two separate methods, 1 trillion 455 billion liras of corporate tax and non-wage income tax were collected in Turkey in 2024. However, the direct tax collection capacity of the Turkish economy is at a level between 11.5 trillion liras and 12 trillion liras. They pay one, and there is 10 in loss and evasion. I will add the calculation of this to the end of the article for those who are curious.

The state does not collect a portion of this tax capacity, the state allows religious sects to collect a portion of it, and taxpayers evade a portion of it. In other words, while one lira of tax is paid, 10 liras fly away. Nearly half of the income and corporate tax taxpayers in Turkey declare a loss every year. Many of them also remain outside the formal economy.

LOSSES FROM INCENTIVES AMOUNT TO 1.6 TRILLION LIRAS

Now, what Mehmet Şimşek needs to remember is this… In 2024, the state gave up on collecting exactly 2.2 trillion liras due to tax exemptions and incentives. Approximately 600 billion liras of this was the minimum wage exemption, and the remaining 1.6 trillion liras were taxes the state gave up on collecting due to incentives.

I will give an example from just one company. Since it is traded on the stock exchange, all data and information are public. In 2024, after adjusting its net profit for inflation, it increased it by 32 percent in real terms. It will distribute nearly 3 billion liras (2.8 billion liras) in profits to its shareholders in 2024. The tax it will pay is zero.

Is it evading taxes? No, the state supposedly gives up on collecting taxes in exchange for values like new investment and job creation. But this company could not even provide employment. In 2024, there was an employment increase of only 463 people, including subcontractors.

The corporate tax rate in effect in Turkey is 25 percent. But the actual corporate tax collected (effective tax) is 9 percent… If 25 percent had been collected as it is on paper, (0.25x890/0.09= 2.472) 2 trillion 472 billion liras of corporate tax would have been collected instead of 890 billion liras. In other words, you could have increased corporate tax 2.7 times without doing any extra tax audits.

THE BIGGEST PROBLEM IS THE TAX COLLECTED BY RELIGIOUS SECTS

But it is not over, Mr. Mehmet Şimşek. The biggest problem is the taxes that the state allows religious sects to collect… We calculated the direct tax capacity as 11 trillion 400 billion liras. Even if you did not conduct any audits and removed the tax exemptions from existing taxpayers, you would have collected nearly 2.5 trillion in corporate tax. Let us subtract this as well. There is still 9 trillion liras of loss and evasion out there.

We do not know how much of this 9 trillion liras you, as the Ministry of Finance, allowed religious sects to collect. As is known, during the AKP government period, there are religious sect and community foundations to which the government has granted the privilege of collecting taxes under the name of food banking. While 5 percent of donations made to other foundations and associations are tax-exempt, 100 percent of donations made to these are tax-exempt… We witness many religious sect leaders, their daughters, children, and sons-in-law driving around in high-priced vehicles. We see many sect sheikhs and their followers who have become wealthy for no reason on the streets, in newspapers, on social media, and on television. You know how the system works, but let us remind you anyway. Religious sects work like a parallel tax office.

Let us say a joint-stock company or an income tax payer is going to pay 1 billion liras in tax. I am giving the rates as an example. This company or person goes to the sect foundations. They pay 500 million liras to that sect foundation under the guise of building a mosque, school, dormitory, or aid to Gaza. However, that foundation gives this company a receipt for 1 billion liras. The person gets rid of 500 million liras of the tax they were going to pay. The sect takes 500 million liras, spends 100 million liras of it for the relevant work (such as school, mosque, dormitory construction, aid to Gaza, Ramadan packages), and the remaining 400 million liras are divided within a hierarchy. We do not know how much this amount is. I think a bureaucrat in the Ministry of Finance can easily calculate the scale of this amount.

The part of the 9 trillion liras whose size we do not know is also being lost in the informal economy and through loss declarations.

THE RIGHT QUESTIONS ARE THESE

Yes, Turkey needs to prevent tax loss and evasion. Will the collection of taxes by religious sects on behalf of the state be ended?

Will tax incentives and exemptions that serve no purpose be abandoned?

If there is determination on these two issues alone, the treasury could increase the taxes it collects by at least 5 times without even conducting any additional audits. However, despite the Palace, and despite the power of religious sects and capital, will Mehmet Şimşek be able to touch these two areas?

EXPLANATIONS AND NOTES

WHY DID MONETARY POLICY NOT HELP REDUCE INFLATION? The demand that causes inflation in Turkey stems from the consumption of the top 20 percent income group of the population. This segment already has a high income. 78 percent of the deposits in banks belong to only 1 percent of total depositors. You gave high interest rates to this wealthy segment, and they continued to consume more with the interest income they earned. The increase in the import of consumer goods while the import of investment goods and intermediate goods decreases also confirms this view. But both the Minister of Finance and the Central Bank management tried to further reduce the demand of low-income people, especially retirees, workers, and farmers, which had already physically decreased, and they were not successful in the fight against inflation. With the high-interest rate policy implemented, industry and production contracted, and the economy shrank. A shrinking economy, of course, had an inflation-reducing effect, but it could not have contributed to reaching the targeted inflation levels, and it did not.

TAX LOSS AND EVASION IS 12 TRILLION LIRAS… THEY PAY 1, THEY EVADE 10…

I have written many times and explained on television, starting from both the 2024 budget results and the 2025 budget targets. Let us remind you once again based on the 2024 budget realizations.

Collected Tax 7 trillion 305 billion TL

Total Direct Taxes (Income + Corporate Tax) 2 trillion 418 billion liras and its share in the total is 33… (Income Tax 1 trillion 528 billion liras + Corporate Tax 890 billion liras.)

Total VAT, SCT, other indirect taxes and fees 4 trillion 887 billion liras and its share in the total is 67 percent…

However, in a fair tax system, indirect taxes should have a 30 percent share, and declaration-based direct taxes should have a 70 percent share.

We see from the 2024 results that the Turkish economy can collect 4 trillion 887 billion liras in indirect taxes. In an economy with a normal tax system, indirect taxes of 4 trillion 887 billion liras should have had a 30 percent share. If 4 trillion 887 billion liras is 30 percent, how much should the 70 percent direct taxes have been? (Let us do the cross-multiplication. 4.887 x 0.70 / 0.30 = 11.403 trillion liras…)

What is the total of Corporate Tax and income tax excluding wages?

If we subtract worker and civil servant withholding taxes (63 percent) from the 1 trillion 528 billion liras of income tax, 565 billion liras of income tax remains as rent and other withholding taxes. 890 billion liras is corporate tax... The sum of the two is 565+890 = 1 trillion 455 billion liras.

However, what was the direct tax collection capacity of the Turkish economy? Exactly 10 times that. 11 trillion 403 billion liras…

The state does not collect a portion of this, the state allows religious sects to collect a portion of it, and taxpayers evade a portion of it. In other words, while one lira of tax is paid, 10 liras fly away. Nearly half of the income and corporate tax taxpayers in Turkey declare a loss every year. Many of them also remain outside the formal economy.

Another way to verify this capacity can be done through national income accounts. The size of Turkey's GDP in 2024 was 43 trillion 411 billion Turkish liras. In general, the ratio of taxes to national income in the USA is 40 percent, and in European countries, it varies between 45 percent and 55 percent. In our country, the taxes collected in 2024 were 7 trillion 305 billion liras, only 17 percent of the GDP. However, let alone 45-55 percent as in Europe, if it had been collected as much as 40 percent as in the USA, it would have been around 17 trillion liras. When we subtract the nearly 5 trillion liras of indirect taxes from here, we can make a direct tax capacity estimate of 12 trillion liras, and this amount is consistent with the amount we found with the previous 30/70 ratio.