ε = b11 ∙ b12 or b11 ∙ b12 ≡ b13 = ε = 0, 9405055 ≈ 0,953928
there is a slight difference between the two elasticities; they are almost equal.
As a result, our analysis on income tax elasticity using Tanzi’s method shows that long run income tax elasticity in
Turkey for the period 1975-2005 is 0.95, which is slightly less than unity. This means that an increase in real
income causes almost the same magnitude of increase in income tax revenue; in other words income tax revenue is
almost unit elastic with respect to income.
3. CONCLUSION
This study aims to estimate the long run elasticity of the Personal Income Tax in Turkey in the period 1975-2005.
This estimate is deemed to be important for formulating the government budgets and monitoring the progress of tax
collections, for the specification of tax functions in terms of macroeconomic policymaking and for the automatic
stabilizing properties of the tax system and for the public sector deficit during periods of growth in nominal
income.
Tanzi’s method, which is considered as the most attractive and famous of the existing approaches in the literature is
used in this study. Our variables are income tax revenue, taxable income and total income. All of these variables
are deflated by GNP deflator. We apply Augmented Dickey Fuller (ADF) and KPSS unit root tests to determine the
time-series properties of our variables. These tests indicate that all our variables are integrated of order one and that
Johansen cointegration tests can be applied.
Our results from Johansen trace and maximum eigenvalue tests for the period 1975 - 2005 show that personal
income tax elasticity in Turkey is around 0.95, which is slightly lower than one. This can be interpreted as personal
income tax revenue being unit elastic with respect to income. As real income increases, real personal income tax
revenue increases almost by the same percentage.
This result also means that in the long run, specifically between the years 1975-2005, as real income in Turkey
increased, real income tax revenue increased almost by the same amount. Increases in income did not led to higher
increases in tax revenue. In this sense, increasing real income can be considered as insurance to maintain an
equivalent increase in tax revenue to real income; however it does not seem to be the way to obtain tax revenues
higher than increases in income. To be able to have “higher” tax revenue increases, government needs to pursue
other policies in addition to promoting increases in income. This could be through changes in tax rates; such a
policy change has been put into implementation in 2006.
This study provides an important step in analyzing the income tax system in Turkey. Further research on personal
income tax should focus on personal income tax brackets and the income tax revenues corresponding to these
brackets. Such an analysis would show how different tax rates and different income levels affect tax revenues. This
actually is necessary to investigate the efficiency of the system and to be able to make sound policy
recommendations for government fiscal policy.
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