An evaluation of indirect taxes in Turkey

The share of indirect taxes in tax revenues, specifically consumption taxes, is quite high in Turkey when compared to other OECD economies. This emphasis on indirect taxes in Turkey, as well as other developing economies, is argued to emerge from the inability of the government to collect direct taxes because of the existence of a large informal sector that is not easily taxable. It has been suggested that the recent increase in the indirect taxes puts the burden on mostly the poor, raising concerns of inequality. This paper evaluates the efficiency of the current indirect taxes in Turkey by taking into account distributional concerns. Using data from the 2003 Household Budget Survey, we estimate elasticities of different consumption goods and services using AIDS method. We then perform a marginal tax reform analysis to assess the efficiency of indirect taxes. Our findings indicate that there is room for improvement and the current tax rates are not optimal.