The Impact of Tax Policy on Income Distribution in Turkey: 1980-2018

Abstract

Nowadays, inequality in income distribution is one of the major problems. In economic development, it is expected that the income should be equally distributed. But income is not evenly distributed without any other external policy intervention. Therefore, governments intervene in income distribution through financial policy via taxes. Direct taxes are fairer taxes because they are charged according to the income level of individuals. However, the share of direct taxes in total tax revenues is lower than the share of indirect taxes in Turkey. The purpose of this study is to explain how income distribution is affected by the change in taxes. To see the result of this effect, the relationship between the taxes and Gini coefficient is analyzed by performing ADRL boundary test method. Turkey’s data between the 1980-2018 periods is used to indicate how the change in the ratio of various taxes and total tax revenue to GDP affects the Gini coefficient. The result of this study, an increase in tax on goods and services %GDP causes an increase in the Gini index in the short-term and reducing effect in the long period. A rise in tax revenue %GDP decreases the Gini index in the short run and increases the Gini index in the long-term. Lastly, an increase in tax on corporate profits %GDP deteriorates income distribution in the long run.