PERSONAL INCOME TAX ELASTICITY IN TURKEY: 1975-2005*
Yeçim Kuçtepeli
Dokuz Eylül University, Faculty of Business, Department of Economics,
Kaynaklar Yerleskesi, Buca 35160 izmir-Turkey
Onur §apçi
Dokuz Eylül University, Faculty of Business, Department of Economics
Kaynaklar Yerleskesi, Buca 35160 izmir-Turkey
Abstract
The estimation of tax elasticity; the response of tax revenues to changes in income, is important for at least three
reasons: i) formulating government budgets and monitoring tax collections (Sen, 2002), ii) the specification of tax
functions, iii) the automatic stabilizing properties of the tax system and the public sector deficit (Hutton, Lambert;
1980, 1982).
Among the various approaches to tax elasticity calculation in literature (Tanzi, 1969, 1976; Greytak and McHugh,
1978; Hutton and Lambert, 1980; Ehdaie, 1990), the most famous approach is Tanzi’s Method due to its simplicity
and the consensus about its correctness of elasticity estimates.
Johansen cointegration tests for the period 1975 - 2005 show that personal income tax elasticity in Turkey is
around 0.95, indicating almost unit elasticity. Increasing income can be considered as insurance to maintain an
equivalent increase in tax revenue; however it doesn’t seem to be the way to obtain higher tax revenues.
Key words: personal income tax, tax elasticity, Tanzi method
JEL Classification: E62, H24
1. INTRODUCTION
The estimation of the likely response of tax revenues to changes in income is a central empirical issue in applied
public economics. This estimate is important for at least three reasons: i) for formulating the government budgets
and monitoring the progress of tax collections (Sen, 2002), ii) for the specification of tax functions in terms of
macroeconomic policymaking, iii) for the automatic stabilizing properties of the tax system and for the public
sector deficit during periods of growth in nominal income (Hutton, Lambert; 1980, 1982).
In terms of the first reason, in the 1980s, supply-side economists argued that high marginal tax rates were reducing
the incentives of people to work, and cutting tax rates by stimulating people to work harder and to earn more
income could actually raise revenue. If tax cuts lead to large behavioral responses by individuals, the implications
are quite important for the tax policy. The greater the behavioral response, the less revenue is raised by high tax
* This paper was presented at the 2nd. International Conference on Business, Management and Economics by Yasar
University, 2006