The Effect Of High Inflation Periods On The Tax System in Turkey

Abstract

Turkey faced chronic high inflation during the late 20th and early 21st centuries, significantly impacting its economic and fiscal systems, particularly its tax structure. High inflation caused a decline in the real value of tax revenues, the expansion of the informal economy, and adverse effects on taxpayer compliance. These challenges made financing public expenditures more difficult and contributed to budget deficits.Inflation also led to the phenomenon of "bracket creep," where taxpayers moved into higher tax brackets due to nominal income increases, disproportionately burdening low-income individuals and creating income inequality. Additionally, delays in tax collection and distortions in tax bases resulted in real losses in public revenues and pushed economic activities into the informal sector. Tax policies implemented during Turkey’s high inflation periods were insufficient to address these issues.The study examines the effects of high inflation on the tax system through both a historical perspective and international comparisons. During the 1980s and 1990s, high inflation exacerbated budget deficits, expanded the informal economy, and weakened tax compliance. Although the reforms following the 2001 economic crisis successfully controlled inflation, structural issues in the tax system remained unresolved. The post-2020 period of high inflation has once again brought these challenges to light.This study addresses topics such as inflation accounting, broadening the tax base, and combating the informal economy, offering solutions like adjusting income tax brackets in line with inflation and reducing reliance on indirect taxes. Establishing an effective tax system in combating inflation is emphasized as crucial for both economic stability and social justice. The study concludes by highlighting how lessons learned from Turkey's experiences can inform future policymaking.