The 2020 annual budget, written by the office of the president and passed on to parliament for approval, shows major increases in tax income that are parallel to the five percent growth outlined in the government’s new economic program.
According to the new budget, the president’s office is planning to increase income taxes by 11.1 percent, corporate taxes by 15 percent, special consumption taxes (ÖTV) by 20.6 percent, customs duties by 35.1 percent, and motor vehicle taxes by 22.5 percent. The total budget is 1.96 trillion lira, and the budget deficit at the end of 2020 is projected to be 138.9 billion lira.
The economic crisis hit tax revenue hard
The government expected a tax revenue of 757 billion lira in 2019. However, according to Treasury and Finance Ministry data, the total amount of taxes collected in the last nine months was only 485.3 billion. By the end of the year, tax revenue is expected to reach 600 billion lira—a 20 percent lower tax revenue than was expected for 2019.
The revenue target for income taxes in the 2020 budget has been raised to a record 785 billion lira. Experts say that the government has decided to increase the tax burden on society after the economic crisis and increased public spending put the administration in a difficult financial position.
‘2020 target is to increase tax income’
Speaking to Deutsche Welle Turkish about the objectives of the government’s budget, economist Sinan Alçın says it looks like the government is focused on increasing tax revenue in the 2020 budget. "It's clear that the government wants to earn as much tax income as possible in 2020, instead of ensuring income equality,” he said.
Stating that the economic crisis had an impact on tax revenue, Alçın said said indirect taxes, which include taxes on consumption and make up 75 percent of all taxes, decreased in 2019 due to lack of economic activity. “Companies abstained from new investments and spending this period,” Alçın added.
New 'tax package' on the way
The government is working on a new tax reform package to be implemented mid-2020 in order to prevent tax loss. The package involves increasing the number of businesses registered for electronic billing from 140,000 to 300,000, while decreasing corporate tax from its current level of 22 percent to under 20 percent.
In the said regulation, it is planned to increase the income tax paid by the wage earners who earn 500 thousand gross annual gross income, renting house owners, business people and self-employed people from their companies up to 35 percent to 45 percent.
Under the new regulations, workers who earn more than 500,000 lira a year, homeowners who rent their properties out, business people who receive dividends and self-employeds workers will see their tax burden increase from its current level of 35 percent to up to 45 percent. This plan has been referred to as the “Wealth Tax.”
Turkey unsuccessful in collecting taxes
According to OECD figures, the ratio of general government revenue to GDP in Turkey is 24.9 percent while the OECD average is around 34.32 percent. This number puts Turkey in behind 30 other OECD countries. Considering Turkey's population and economic volume, the country is performing unsuccessfully when it comes to collecting tax revenue.
Ernst and Young Turkey Tax Services Publishing Director M. Fatih Köprü says that if the share of tax income grows in 2020, it has to go back to public services such as education and health. Saying that society will react poorly if this doesn’t occur, Köprü adds:
"The size of income and corporate taxes, meaning direct taxes, in all tax income is only 32.5 percent according to the 2019 budget numbers. And the KDV (value-added tax) and ÖTV (special consumption tax) alone make up almost 53 percent of all tax income. In order to turn this picture around, to increase the share of income tax in the budget, the informal economy must be tackled efficiently."
‘Tax fairness is not ensured’
So, why is the tax system not working as well as it should?
According to Fatih Köprü, the fact that the majority of income taxes come from employee wages creates a big injustice against workers, preventing the creation of a more fair tax system.
In Turkey, income taxes are deducted from workers’ paychecks before they even receive their wages. For example, the minimum wage for 2019, which was set at 2,558 lira, goes down to 2,020 lira after deducting income taxes, social insurance premiums, unemployment insurance and stamp taxes. Thus roughly 21 percent of workers' income is taken by the state before they get paid.
‘The tax collected from workers keeps increasing’
Fatih Köprü also reminded that for every purchase of a consumer item, KDV and ÖTV are applied automatically. "Every kind of spending, even buying staple foods, includes KDV. Many other categories like gas, cigarettes, furniture, electronic products and vehicles also include ÖTV in the price. This means that workers who already pay automatic income tax also pay these indirect taxes, multiplying the amount of tax paid."
Will the 'Wealth Tax' work?
Then, will the 'Wealth Tax' plan be useful in increasing tax revenue?
According to Prof. Dr. Hakan Üzeltürk, Yeditepe and Galatasaray University Law Faculty Tax Law Lecturer and Istanbul Tax Center President, the problem with Turkey's tax system is not a need for new regulations, rather it is the deficiencies in the application of those regulations. "When the current system has serious problems in collecting taxes, when the taxpayer is used to regular tax amnesties, when audit mechanisms do not work efficiently, then some initiatives may end in negative results. Therefore improving the current system may lead to more beneficial results" he said.
'Taxes and the law must be considered together'
Üzeltürk also added, "To ensure tax fairness in Turkey, inequalities between taxpayers must be eliminated," mentioning that if taxpayers evade paying taxes, honest taxpayers who contribute their share are forced to take a higher tax burden. Adding that another fundamental problem is an "absence of law," he said:
"A tax culture should be created: people should know where collected taxes are spent and belief in tax fairness should spread in society. There should be no tax amnesties, audit mechanisms must be improved, financial strength and legality principles should be realized, taxes and the law must be considered together, and the tax judiciary must function quickly: these are the basic matters that should be improved upon."