The Distributional Effects of Tax Policy: Tax Expenditures in Turkey

Introduction

Since the late 1970s, there has been a general deterioration of income distribution in most countries around the world¹ (see Chu, Davoodi, & Gupta, 2000; Stiglitz, 2012; Piketty, 2014; Tanzi, Chapter 1 in this handbook). Even though the most recent data are not yet all available, as Martinez-Vazquez, Vulovic and Dodson (2012) suggest, “all indications are that inequality has increased as a consequence of the 2009 global crisis and the following recession” (p. 95). As a result, inequality became a heated topic after the global crisis² and the interest in income distribution, its changes and the underlying factors have increased.³ Widening income disparities that increasingly become visible have also heightened the interest in the role of fiscal policy as a redistributive instrument in the short run and in the long run, as well as in the progressivity (or the lack thereof) of tax and transfer policies (Chu, Davoodi, & Gupta, 2000).

Although the principal function of tax policy is to ensure the collection of sufficient tax revenues to financing public expenditures, it is indeed much more than that. “It is also a major instrument of government policy used to influence the distribution of income as well as discouraging some activities through additional taxation and encouraging others through tax concessions. Such tax concessions are known as ‘tax expenditures’” (James, Chapter 3 in this handbook). Tax expenditures are a common channel for financing government policies outside the budgetary framework. Contingent liabilities are another common channel for such “hidden” spending that tends to arise from a government’s explicit and implicit promises of financial support (Swift, Brixi, & Valenduc, 2004, p. 2). Tax expenditures are an important and possibly growing spending item in public budgets (Avram, 2014).

If used properly, tax expenditures can play an important role in implementing government policy priorities. For example, a number of well-regarded programs for the poor take the form of tax expenditures. Redistribution plays a central role in the tax and benefit system, and the trade-off between redistribution and efficiency is at the center of many debates about tax policy. Chu, Davoodi and (2000) claim that “[t]he major aim of tax policy as a redistributive instrument should be to raise the revenues needed to finance efficient pro-poor and other essential government expenditures and to avoid generating horizontal inequities.”

Although operating on the tax side, tax expenditures resemble direct spending programs. They both have similar budgetary effects and provide selective benefits that alter the allocation of resources. Like spending programs, they may often be justified because of public policy benefits but should be regularly monitored and evaluated. Tax expenditures, however, do not regularly receive the same level of scrutiny as direct spending programs. Unless, tax expenditures are exposed to adequate scrutiny, they may invite fiscal opportunism. When scrutiny is lacking, as Ansu and Laursen (2004) suggest, “it is difficult, if not impossible, to evaluate the cost, efficiency, and equity impact of tax expenditures and the extent to which resources could be rationalized or better allocated to strengthen government finances and to support progress toward broader economic and social objectives” (p. xi). Therefore, it is important to discuss tax expenditures and ways of dealing with them. An analysis of tax expenditure can contribute to the tax policy debate and shed light on trade-offs with direct spending programs.