Turkey\s Laffer Curve: Kalman Filter Estimation Technique

Abstract

In this study, the Laffer curve and the relationship between the tax revenue and the tax rate for Turkey have been investigated. Annual data for the period of 1960-1993 are used as the sample. A quadratic function for the Laffer curve is specified and estimated under the Kalman Filter technique. The findings of the Kalman Filter estimation technique imply that the Laffer curve and the tax rate which is maximizing the revenues were not fixed during the sample period. According to the results of the study, it was expected from the tax administration to maximize tax revenues when average tax rates lie in the range of 0.136-0.175. When the tax rates that are maximizing the revenues are compared with the current tax rates, it appears that the Turkish tax administration has operated in the inefficient region of the Laffer curve for many years. Four periods where the tax administration has operated in the inefficient region of the curve were identified. In 1993 the average tax rate w as 0.195 while the tax rate that w as maximizing the revenues w as about 0.17. It me an s that in 1993 there w as a possibility for the tax administration to raise the total tax revenues by reducing the current average tax rate, but this was not realized.