A tax reform of calculated timidity

Since I started writing for Today's Zaman almost two years ago, I have complained about the Justice and Development Party (AK Party) government's lack of appetite for economic reform. Many radical reforms that took place under the Medium-term Economic Program (OVP) like severance pay, higher education and tax reform have either been pulled back from the agenda at the last moment, as in the case of the severance pay reform, or emptied of substance as in the case of the higher education reform.
With regards to the tax reform, the last OVP defined the goals of the public income policy as follows: Encourage employment and investments, increase domestic savings, reduce regional disparities, strengthen the competitiveness of the economy and fight the informal economy. Needless to say, these ambitious goals require comprehensive and radical changes in the existing tax system. Does the actual income tax draft law submitted for ministers' signatures reflect those kinds of changes? I regret to say “Partially, at best.” The basic problem of our tax system is well known. Finance Minister Mehmet Şimşek defined it once again during a press conference last week. The share of income and profit taxes in gross domestic product (GDP) stands at 10.4 percent in Europe but only 5.8 percent in Turkey. Mr. Şimşek added that the tax collection rate is far below the country's economic potential. Thus, the basic goal of a tax reform should be to fill this big gap by widening the tax base on the one hand and fighting tax evasion on the other. But at the same time, in order to encourage employment, to reduce regional disparities and fight the informal economy, tax rebates complying with these goals should be implemented. The loss of tax income due to these rebates could be compensated by the extra income received from an improvement in tax collection. The actual income tax draft law stands quite mild compared to the ambitious goals defined above. The measures foreseen can be summarized in three points: 1) Some exemptions for high salaries and multiple incomes, such as dignitaries as well as football players' incomes, have been either cancelled or reduced. The government expects an additional 126,000 income tax declarations from these measures. 2) Urban rents will be taxed more efficiently through measures canceling tax exemptions from the sales of houses and rentals. 3) Financial assets income will be taxed according to maturation periods; this measure aims to better capture speculative income. That is all; the Ministry of Finance did not give any estimates regarding the extra tax income that is expected from these measures. The absence of an impact analysis that should accompany economic laws is typical in Turkey. Let me point out that in the US there is a special institution, the Congressional Budget Office, which is in charge of analyzing tax law proposals and providing information to members of Congress before voting on the eventual impacts of measures on public finances, income distribution and so on. Here, the government and the economy bureaucracy are either supposed to know the eventual impacts but keep the information to themselves or, more plausibly, find out through trial and error. In any case, I think the extra income that can be expected will be far from fulfilling the tax collection gap between Turkey and Europe. I can assert this all the more since a serious measure to tackle tax evasion is crucially lacking in the draft. Mr. Şimşek made it clear: There will be no cross checks between expenditures and income declarations. This means that millions of tax evaders, particularly the richest ones, can continue to sleep in peace. In fact, any improvement in tax collection crucially depends on these cross checks complemented by severe penalties in cases of evasion. To tell you the truth, I am not surprised. A serious fight against tax evasion and more radical changes concerning tax exemptions would seriously hurt a number of people, some -- maybe even the majority -- of whom are AK Party voters. In the wake of the coming elections, one cannot expect radical tax reforms from any democratically elected government. Thus, let me conclude by saying “Better than nothing” and hope that this first step taken in the right direction will be followed by others when the elections are over.