Fatih Özatay, PhD - [Archive]

An interesting comparison on taxes 25/11/2010 - Viewed 1297 times

Ireland's tax revenue is higher than Turkey's.

Ireland has finally agreed to design and implement an economic package in cooperation with the IMF and the EU. The reason for Ireland' reluctance to sign this program was that such program would force it to raise tax rates. The country carried out a number of reforms in the context of the development attempt launched in mid 1980s part of which included tax reform. In Ireland corporate sector is obliged to pay 12.5 percent of its revenues in form of tax. 

Low tax rates are not to blame

Ireland has the lowest corporate tax ratio among OECD countries. But the current situation in Ireland is obviously not related with low tax rates. Financial system is on the edge of bankruptcy particularly due to mortgage housing loans. The bailout operation for banks has disturbed the public budget substantially. Therefore raising tax rates is on the agenda.

In Turkey corporate tax rate is 20 percent. This is considerably low compared to other OECD countries; but the rate is evidently high in comparison to Ireland's. Then, how do you think the two countries compare in terms of collected tax revenues as a ratio to GDP? You would normally expect that Turkey has higher tax revenue as a ratio to GDP given that tax rates are higher than in Ireland?

But this is not the case. Neither corporate tax revenue nor overall tax revenue of Turkey is higher than Ireland. The table below presents the figures for the 2005-2008 period. The figures are from OECD online database and are as a ratio to GDP. Ireland's tax revenue is higher than Turkey's. The difference tends to narrow down in 2008; however that year Ireland's economy contracted by 3.6 percent while Turkey's economy grew though slightly. It is highly interesting and worrisome, right?

Even this simple comparison shows clearly one of the major problems of Turkey: Turkey's tax revenues are quite low. We have to collect more tax revenues without increasing tax rates. Two important points to underline: first, if we seek to break in an upper international welfare league, we have to carry out reforms. This will incur costs; we need funds to this end. Then, how can we generate funds? Second, we can improve the growth rate only if we can borrow from abroad since savings are not sufficient. Therefore, savings rate should be increased. But how? Answer to these questions signal that tax revenues should be increased. It is not easy to achieve this; but we have to attempt at one point.

This commentary was published in Radikal daily on 25.11.2010