Tax reforms to create new jobs, Turkey

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To take away barriers to formalisation and to reduce the costs of labour, the Turkish government introduced a series of tax reforms aimed mainly at reducing the tax burden for companies and employees. Since 2006, these reforms have resulted in the creation of many additional formal jobs.

 

Background

Yoo (2003) states that the OECD found that Turkey’s tax burden on inward foreign direct investment (FDI) was amongst the highest of OECD countries. Because of this, and other issues with the tax system, major reforms have been undertaken by the Turkish government. A multitude of measures have been implemented, such as reducing tax distortions, simplifying the system, making it more transparent and improving tax collection. This has been done with the aim of bringing the tax system closer to best international practices (Leibfritz, 2009).

Objectives

The objective of the reform was to reduce undeclared work by making the tax system simpler and more effective.

Specific measures

In 2006 the Turkish government reduced the statutory corporate tax rate from 30% to 20%. It simultaneously broadened the tax base by eliminating the 40% investment allowance.

With regards to the personal income tax, in 2004 the top marginal rate was reduced for wage income from 49% to 35% and for non-wage income from 45% to 40%.

With the aim of reducing the labour ‘tax wedge’, a tax-free minimum living allowance (MLA) was introduced in 2008. Furthermore, the government cut the employer contributions for social security by five percentage points across the board and introduced exemptions for hiring young workers and women workers for a five year period.

Lessons and conclusions

Achievement of objectives

The success of the MLA is reflected in the fact that, as a result of this measure, the labour ‘tax wedge’ has been reduced by 2.5% or over 6%, depending on family status and the income level of the worker. Furthermore, the general reduction of the employer’s contribution to social security by five percentage points reduces the average labour ‘tax wedge’ by around 2.5 to below 3% (Leibfritz, 2009).

According to estimates by the World Bank, the targeted labour tax cuts for young workers and women workers could lead to the creation of between 163,000 and 235,000 additional jobs within the first year of the measure being employed.

In conclusion it seems as though the recent reforms have lowered the extent to which the tax system acts as a barrier to formalisation.

Transferability

Measures included in the tax reform can be transferred to other countries with complex tax systems, especially those seeking to gain transparency.

Contacts

Ministry of Finance

Bibliography

Yoo, K. (2003), Corporate taxation of foreign direct investment income 1991–2001, Economics Department Working Papers No. 365, OECD Publishing.

Leibfritz, W. (2009), Reducing undeclared work in Turkey – the role of tax policy and administration, Background paper prepared for the World Bank Country Economic Memorandum on Informality: Causes, Consequences, Policies.

 

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