To
1) V =
where T = tax liabilities and I = income. This measure would be best for estimating progressivity
(Rosen, 2005:277)
and comparing the progressivity of one tax system compared to another tax system. (Rosen, 2005:278)
2) V =
T 1-To
To
11-I0
I0
where T = tax liabilities and I = income. This measure would be best for estimating tax elasticity
The most attractive and famous of the existing approaches in the literature is the Tanzi’s Method. Its simplicity in
application and the consensus about the correctness of its elasticity estimates has made this model widely used in
empirical studies.
Tanzi’s method has the advantage of providing not only estimates or the elasticity and flexibility of the income tax
but also estimates of the elasticity of the tax base and elasticity of the rate structure (Tanzi, 1969:206). Tanzi’s
method however, does not necessarily measure the elasticity with respect to equiproportionate growth. It measures
the revenue responsiveness for aggregate if the national distribution of income evolves in a manner parallel with
the interstate pattern of distributional differences (Fries, Hutton and Lambert, 1982:149).
There are two effects that have to be mentioned in terms of income tax elasticity; exemption effect and rate effect.
According to the exemption effect, at low levels of income, small increases in personal income or adjusted gross
income are accompanied by very large percentage increases in taxable income and very high tax elasticity. The
exemption effect will decline in importance as more taxpayers’ adjusted gross income exceeds the amount of their
exemptions, but will vanish only when all taxpayers have positive taxable income. Taxable income per return
however will continue to be accompanied by a high elasticity because of the rate effect. Under a progressive rate
structure, increases in taxable income per return will cause effective average and marginal tax rates to rise and
revenues will thus rise more rapidly than taxable income. The rate effect will persist as long as effective marginal
tax rates rise with increasing income, that is, over the progressivity of the tax structure. Once all taxpayers have
reached the maximum marginal tax rate the rate effect will vanish. Future values of the tax elasticity will depend on
base effect, the extent to which the taxable income base increases at a rate different from adjusted gross income or
personal income. On the basis of the slow growth rates of deductions and exclusions (such as transfer payments)
the base effect seem likely to yield tax elasticity slightly greater than unity over wide ranges of tax revenue and
personal income (Singer, 1970:427).
The estimation of the elasticity of taxable income and the responses to taxation begins with the work of Lawrence
Lindsey (1987). According to Lindsey, the elasticity of taxable income for the highest-income taxpayers is greater
than one. Feenberg and Poterba (1993) estimates that incomes raise substantially for the group that had the largest
relative cut in their marginal tax rates. The research from 1980s indicates in general large income tax elasticities.
However, in the 1990s the elasticity of income tax is found to be significantly lower than one (e.g. Slemrod 1998;
Goolsbee, Hall and Katz, 1999). These findings are mostly based on the U. S. data. There is no study which
estimates the income tax elasticity for Turkey as to the knowledge of the authors.
In this study, the tax elasticity of the Personal Income Tax in Turkey in the period 1975-2005 will be calculated by
using Tanzi’s Method. The elasticity estimates obtained from this study will show us the responsiveness of the