Tax justice in Turkey: They pay 1, they evade 10

The new tax package prepared by the Minister of Finance is being debated. There are a few nice (most likely unimplemented) items tucked into the package to pull the wool over people's eyes, but the best reaction came once again from the citizens, especially those with low incomes struggling to make ends meet. "Deli Dumrul Taxes..."

Tax matters are the business of tax experts. I am an economist, not a tax expert. I will look at the issue from an economist's perspective. The two-sentence summary of this article is as follows:

In one-man regimes, tax justice can never be achieved...

For the year 2024, companies and self-employed individuals in Turkey will pay 1 trillion 370 billion in taxes, while they will evaporate 10 trillion liras. (They evade some of it, and the state knowingly does not collect some of it.)

WHY THERE IS NO TAX JUSTICE...

Tax is the most important part of the state-citizen relationship. The definition of a modern state is "the organized form of the citizen." There are mutual obligations and rights between the citizen and the state. The state collects taxes for all the obligations it will fulfill, such as defense, public order, education, health, social security systems, infrastructure investments, and the like. Tax is the revenue collected for the state to fulfill its obligations.

In authoritarian types of states that move away from the modern definition of state and are characterized as sultanism, rather than providing services to citizens, it is important to enrich those who govern the state and their circle, as well as the capital that will support them, and to provide for the authoritarian expenditures that will sustain the regime.

Tax justice in Turkey has gradually deteriorated since 1980. This deterioration has increased even further during the AKP era. With the 2018 one-man regime, the state-citizen relationship also changed. The political economy of the government was shaped accordingly.

The state-citizen relationship took the form of "Keep them hungry so they obey, keep them ignorant so they submit" instead of a citizen who "demands rights and services." In such regimes, as in every field, you cannot achieve justice in taxation.

HOW IS TAX JUSTICE ACHIEVED?

Tax justice cannot come until the one-man regime ends. But even if the one-man regime changes, there is no guarantee that tax justice will come. Taxes must be fair both when collected and when spent. It is the job of tax experts to reveal the details of fair taxation during collection... As economists, we can refer to general practices in the world. The most basic principle is to tax those who earn less, less, and those who earn more, more. One of the most important indicators of this is how much of the collected taxes are indirect taxes and how much are direct taxes.

In Western European countries, where the tax system is considered fair, direct taxes (taxes paid by individuals and institutions based on their earnings) account for 70 percent of total taxes. The sum of taxes taken from the consumption of goods and services, such as VAT and SCT, as well as fees and similar taxes, is 30 percent...

In Turkey, it is the exact opposite... The share of direct taxes is 30 percent, and the share of indirect taxes is 70 percent.

Direct taxes are also completely unfair in themselves...

The share of income tax in total taxes is 14 percent... In 2024, the state plans to collect 1 trillion 189 billion TL in income tax. 92 percent of this, 1 trillion 93 billion liras, will be paid by workers and civil servants whose taxes are deducted in advance. The remaining 95 billion liras will be paid by large shareholders, bosses, jewelers, contractors, lawyers, architects, engineers, dentists, doctors, financial advisors, restaurant owners, pastry chefs, tailors, and various self-employed professionals, numbering 2.5 million people. That is approximately 3,000 TL per person per month.

Among direct taxes, there is the Corporate Tax taken from company earnings. Those massive companies, the operators of those massive roads, bridges, and highways, or the large firms you see and know closely... Their number in Turkey is 1 million 143 thousand... The total tax they will pay for the year 2024 is 1 trillion 276 billion liras. That is, they have a 15 percent share in total tax revenues. The total tax they pay for a company is around 1 million liras per year... But for example, one of these taxpayers paid a 1.5 million lira bill for just one evening in Bodrum. Neither the person who paid the 1.5 million lira bill nor the restaurant that charged that person 1.5 million liras shows the payment in their tax records. (According to the article by our journalist colleague Murat Ağırel in Cumhuriyet Newspaper)

When we add up the direct taxes, they are all 29 percent... 2 trillion 465 billion liras... However, if we exclude the worker and civil servant portion, the total tax based on declaration is 1 trillion 370 billion liras. All companies, company partners, contractors, jewelers, merchants, lawyers, doctors, dentists, restaurant owners, pastry chefs, electricians, and all the self-employed professionals you can think of... Their total number is around 3 million 700 thousand people. Yet, according to the 70/30 balance, the tax this segment should pay is 11.5 trillion liras... They pay 1 trillion 370 billion liras, and there is 10 trillion liras in loss and evasion.

In 2024, when we add up SCT, VAT, MTV, communication tax, stamp duty, accommodation tax, fees, fines, and tiny non-tax revenues, the state will collect 5 trillion 972 billion liras in indirect taxes from us. In round figures, 6 trillion liras... This is 71 percent of the total 8 trillion 437 billion liras the state aims to collect for 2024...

IF TAX WERE FAIR

If the scales of justice were working, and there were no tax loss and tax evasion in Turkey, the 6 trillion lira indirect tax would be 30 percent of total tax revenues, not 70 percent. If 6 trillion liras is 30 percent, it means that 70 percent, i.e., the amount of direct taxes, would be 14 trillion liras. 11.5 trillion liras of the 2.5 trillion lira direct tax is loss and evasion. Moreover, we find this amount without even getting involved in the informal economy. We reach this amount from the SCT, VAT, customs duties, and fees that are in the tax office's records.

There is no tax loss among civil servants. There may be a loss among workers due to the informal sector and low wage levels. But the 11.5 trillion lira loss and evasion is not paid by the 1 million 400 thousand corporate tax taxpayers and the 2.5 million jewelers, contractors, lawyers, financial advisors, restaurant owners, dentists, private sector doctors, and all the self-employed professionals you can think of. And the state doesn't collect it anyway...

If we succeed in collecting this much tax from the self-employed and companies, then we can talk about tax reform and a social state. Only then can we go to waiters and couriers and say, "Everyone pays taxes, you should pay taxes too." But on the condition of providing quality and free healthcare services to all the segments we tell to pay taxes, free high-level modern education for everyone, social security at the standard they deserve for retirees, social assistance for the unemployed and the needy to live humanely, quality judiciary, and strong defense services. It is not enough to just collect taxes fairly. It is essential to apply social state principles when spending them.

WOULD THIS MUCH TAX BANKRUPT THE PRIVATE SECTOR?

In this case, the tax that should be collected in Turkey for the year 2024 is not 8 trillion 434 billion liras, but 20 trillion liras, consisting of 6 trillion in indirect and 14 trillion in direct taxes...

Did we exaggerate? Would the private sector go bankrupt, would factories close? We looked at international standards for the 30/70 balance in indirect and direct tax ratios. Let's look at the share of collected taxes in national income (Gross Domestic Product - GDP) here as well.

Turkey's 2024 national income (GDP) estimate at current prices is 41 trillion 453 billion liras. The share of targeted tax revenues in national income is 20 percent. With 20 percent tax revenue, even if we cut the palace's expenses in Turkey, we cannot be a social state. In the USA, this rate is 40 percent. In Western European countries, it is between 45-50 percent. In Northern European countries, it goes up to 55 percent. In these countries, there are no absurd practices like private hospitals and private schools. Even if there is enrichment of cronies, it is very low. The collected taxes are spent for the people.

If we were to collect 20 trillion in taxes according to 2024 data, the ratio of taxes to national income would be 48 percent. I'll give up on 48 percent. If it were 40 percent, it could very well be possible to establish a strong social state. But the first condition for this is again to get rid of the palace regime and the one-man regime.

In any case, if we spread direct taxes to every segment instead of indirect taxes, and reach down to the waiter and the courier, the state-citizen relationship and the voter-taxpayer relationship will also be formed healthily.

A voter who does not settle for what is given, but holds the state accountable for the taxes they pay and demands rights, is the insurance not only of tax justice but also of democracy.

(Note: The informal economy and wealth tax are important topics regarding tax justice, loss, and evasion. These are also subjects for a separate article.)