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Personal Income Tax Elasticity in Turkey: 1975-2005

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  • Yesim Kustepeli

    ()
    (Department of Economics, Faculty of Business, Dokuz Eylül University)

  • Onur Sapci

    ()
    (Department of Economics, Faculty of Business, Dokuz Eylül University)

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    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.

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    File URL: http://www.deu.edu.tr/UploadedFiles/Birimler/12741/06_01.pdf
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    Bibliographic Info

    Paper provided by Dokuz Eylül University, Faculty of Business, Department of Economics in its series Discussion Paper Series with number 06/01.

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    Length: 12 pages
    Date of creation: 11 Jul 2006
    Date of revision: 11 Jul 2006
    Handle: RePEc:deu:dpaper:0601

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    Web page: http://www.deu.edu.tr/DEUWeb/Icerik/Icerik.php?KOD=442
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    Keywords: Personal income tax; tax elasticity; Tanzi method;

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    1. Hutton, John P & Lambert, Peter J, 1982. "Modelling the Effects of Income Growth and Discretionary Change on the Sensitivity of UK Income Tax Revenue," Economic Journal, Royal Economic Society, vol. 92(365), pages 145-55, March.
    2. Alan J. Auerbach & Daniel R. Feenberg, 2000. "The Significance of Federal Taxes as Automatic Stabilizers," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 37-56, Summer.
    3. Singer, Neil M, 1970. "Estimating State Income-Tax Revenues: A New Approach," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 427-33, November.
    4. Hutton, J P & Lambert, P J, 1980. "Evaluating Income Tax Revenue Elasticities," Economic Journal, Royal Economic Society, vol. 90(363), pages 901-06, December.
    5. Austan Goolsbee, 1999. "Evidence on the High-Income Laffer Curve from Six Decades of Tax Reform," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 1-64.
    6. Daniel Feenberg & James Poterba, 1992. "Income Inequality and the Incomes of Very High Income Taxpayers: Evidence from Tax Returns," NBER Working Papers 4229, National Bureau of Economic Research, Inc.
    7. Tanzi, Vito, 1969. "Measuring the Sensitivity of the Federal Income Tax from Cross-Section Data: A New Approach," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 206-09, May.
    8. Latham, Roger, 1988. "Lorenz-Dominating Income Tax Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 185-200, February.
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