The Difficulties of Achieving Successful Tax Reform

This chapter sets out the issues that should be considered in developing successful tax reform. Economic theory makes an essential contribution to the development of tax reform, incorporating issues of both economic efficiency and equity. However, other theoretical considerations demonstrate that successful tax design may be considerably more difficult than seems to be widely thought. In addition, there are matters of tax administration and compliance that have to be taken into account. The changing socio-economic environment within which tax systems have to operate as well, as the political process of tax reform, are also important. Finally, the chapter shows how to develop a systematic approach which can incorporate the many important issues that should be included in developing successful tax reform.

Fiscal Decentralization and Local Borrowing in Turkish Provinces

There have been important developments in the decentralization of the government structure in Turkey since the early 1980s. This paper examines the link between fiscal decentralization and local borrowing within Turkish provinces. It first discusses local government reforms throughout the history of the Turkish Republic with the focus on recent reform efforts and current local government structure. It then provides an empirical analysis of the effects of decentralization in Turkish provinces using cross-sectional and panel data approaches, and spatial econometrics. The dataset consists of 67 provinces from 1980 to 2000, and separately cross-sectional data on all 81 provinces for the year 2000. Using decentralization measures such as number of local governments per capita and ratio of own-source municipal revenue to total provincial tax revenue, and specific characteristics of the municipalities the analysis examines whether variations in local decentralization across these provinces and across time have had a significant impact municipal borrowing in those provinces.

The Distributional Effects of Tax Policy

This chapter first discusses the Turkish tax policy performance for the period of 2004-2013 in terms of equitable distribution of tax burdens. Then, it examines tax expenditures, which are believed to be one of the main sources of inequity in tax burden distribution, in terms of equity and fiscal transparency grounds. The chapter also estimates tax expenditure figures based on very limited data in Turkey. One of the main findings of the chapter is that because fiscal transparency and non-discrimination principles of taxation are violated in Turkey, there are considerable amount of hidden tax reliefs that are not counted as tax expenditures in the Turkish tax system.

Tax Compliance Behavior

The volatility of the global economic market and the fierce competition in attracting foreign investments have determined European and MENA authorities to reconsider interactions with taxpayers. Thus, benefitting from international assistance, authorities have started implementing tax strategies and models like co-operative compliance, horizontal monitoring, whistleblowing. This empirical investigation is grounded on the “slippery slope” framework that attempts to solve the “riddle of tax compliance” via trust in and power of authorities. The former is proxied by “Trust in national government” (Gallup World Poll), the latter by “Rule of law” (World Bank). The two-step cluster analysis run on 215 countries worldwide, including 35 from Europe, 12 from MENA, yielded four tax climates: trust and power high (T+P+), trust and power low (T-P-), trust high-power low (T+P-), trust low-power high (T-P+). While the majority of European countries are spread between T+P+ and T-P+, MENA countries generally belong to T-P-, demanding stability and efficiency in all major areas of the societies.

Tax Systems, Economic Development, and Good Governance

The chapter examines tax structure and its relation to good governance and economic development in the MENA countries. First, it discusses how different tax systems and tax structures in the region compared with other countries. MENA region can be characterized with low level of tax-to-GDP ratio compared to other groups of countries. However, tax systems considerably diverge within the region. Most importantly, whether having hydrocarbon revenues meaningfully divides the region's countries with respect to tax composition, tax levels, tax ratios and tax regimes. Literature suggests that natural resource revenue is also an important determinant of governance and institutional development that have impact on economic development, while good governance, a more legitimate and responsive state is an essential factor for a more adequate level of tax effort. Therefore, the second section of the study examines the relationships between taxation and good governance with emphasis on the MENA region.

Tax Revenues and Tax Efforts across the World

This chapter focuses on the concept and empirical estimation of tax effort around the world. It employs a cross-country study from a sample of 121, developing and developed countries during 1994-2012. Predicted tax revenue of a country is estimated empirically taking into account its specific economic, demographic, and institutional features and is considered as an approximation of its taxable capacity. Tax effort is then defined as the ratio between the share of the actual tax collection and the predicted tax revenue. The use of tax effort and actual tax revenue collection allows us to rank countries into four different groups. The results vary per country and region but, overall, tax revenue collection appears to be in line with its predicted value. This could reflect many efforts undertaken in the last decades to improve tax policy and tax administration. It also suggests that further improvements in domestic revenue mobilization may require other non-tax reforms aimed at removing economic, demographic and institutional constraints hindering tax revenue performance.

Impacts of Global Financial Crisis and Changes in Monetary Policy of Central Banks

The Great Financial Crisis (GFC) has hit developed and developing countries through a number of transmission channel. Some impacts are already disappearing while others are still to strike. In MENA region developing countries to experience the crisis were those with the most globally integrated financial sectors. Next came the impact on trade, as volumes and prices of commodities and manufactures collapsed across the globe. Successful economic policies pursued in the past do not promise these countries' immunity from the crisis. In fact, some MENA countries have already shown a limited capacity to learn from other countries' previous financial crises. Post-crisis spillovers and heightened capital flows have triggered a search for alternative monetary policy frameworks, especially for Turkey and Israel in MENA economies. This paper analyzes the review of the region's monetary regimes and policies, including: monetary policy expansion of the monetary policy framework in promoting financial stability alongside the primary price stability objective.

International Tax Competition and Its Reflections in Turkey

International tax competition has been significantly increased since 1980s as a result of liberalized financial and fiscal policies, while this leads sovereign nations faced budgetary deficit problems and public finance related considerations. This paper aims to analyze how Turkish tax system is affected by international tax competition, services submitted by tax havens and facilities used by multinationals. In 2006, a new Corporate Income Tax Law was introduced in Turkey. One of its purposes is to combat against harmful tax competition and therefore it covered defensive measures such as controlled foreign company (CFC), thin capitalization rule and transfer pricing regulation, to prevent companies from leaving their income abroad. This study aims to analyze effects of international tax competition in Turkey whether there are change in tax rates, tax structure, and tax revenue; and how the government respond it, as a beneficiary; or, a loser.

Transparency, Technology and Taxation

Taxes and tax administration are important. Taxation is one of the main interfaces between state and society: how a tax system is administered may affect not only its yield, its incidence, and its efficiency but also the state itself. Taxation that is widely perceived to be unfair and administered capriciously and corruptly may not only bring the tax system into disrepute but weaken trust in government and even the legitimacy of the state. This paper discusses two important aspects of taxation – its ‘transparency' and the increasingly important role of information technology (IT) in tax administration, as well as how these two topics relate to the broader issues just mentioned.

Attitudes toward Tax Evasion in Turkey

This chapter summarizes and analyzes the latest World Values Survey data on attitudes toward tax evasion in Turkey. In addition to examining the overall viewpoints of the 1601-person sample, we examine ethical attitudes from the perspective of the following demographic variables: gender, age, marital status, education level, employment status, occupation, social class, income level, happiness, position on the political spectrum, sector of employment, and confidence in government. Comparisons with other studies will be made to determine the similarities and differences between Turkish attitudes and the attitudes of people in other countries.