Key words: Custom Union, Economic Integration, Turkey, The European Union, Taxation   
 
 

1. Introduction

     The main objective of economic activities is to enable increase in well-being. In this sense, one of the ways that countries can increase their own welfare is to become a part of an economic integration. Therefore, this fact explains clearly countries’ efforts towards being a part of an economic integration. Turkey’s accession to the EU has effects on taxable capacity, which in turn has effects on tax revenues. The likely effects on tax revenues may vary depending on the degree of economic integration.  The degree of economic integration has different effects on the factors determining taxable capacity of a country, which in turn may have effects on tax revenue.

     The purpose of this paper is to evaluate the effects of Turkey’s EU accession on tax revenues. In this context, this paper tries to answer two main questions. These questions include: how tax revenues are affected with accession to the EU? How tax revenues are affected without accession to the EU?

     The structure of this paper is as follows. Section II gives brief information regarding economic integration types Section III assesses the likely effects of accession. Section IV examines the effects on tax revenues without accession to the EU. Section V evaluates broadly the effects on tax revenues with accession to the EU. Conclusions are presented in the last section. 

2. Economic Integration Types

     Even though economic integration has effects on tax revenues, effects on tax revenues change regarding to type of economic integration. According to Salvatore (2001) five basic types of economic integration are identified. These include: preferential trade agreements, free trade areas, custom union, common market and economic union.

     Preferential trade agreements refer to lower barriers on trade among member countries and higher barriers against trade with the rest of the world.

     Free trade areas a form of trade integration among member countries in which all trade barriers are removed among member countries and each country’s own barriers are maintained against trade with nonmember countries. In other words, every member country has a differentiated external tariff against nonmember countries.

     Custom union a form of trade integration among member countries in which internal trade is freed among member countries and a common external tariff is levied against trade with the rest of the world.

     Common market refers to free movement of factors among member countries in addition to possessing all the features of a custom union.

     Economic union going beyond a custom union is a form of economic integration among member countries regarding unification and harmonization of member states’ fiscal policies and monetary policies.                        

3. The effects of Accession

     The effects on tax revenues are determined by the likely effects of accession on the determinants of taxable capacity. Therefore, importance of the likely effects of accession requires a special attention. In this sense, the likely effects of accession to the EU are examined in this section. A country may increase its welfare with accession to economic integration like the EU by receiving common market benefits in addition to custom union benefits. The benefits received by accession to the EU can be classified as static benefits and dynamic benefits.

     The most commonly emphasized static effect of a common market is trade creation effect among member countries. Elimination of administrative barriers to trade, reduction in technical barriers to trade and mitigation of risk and uncertainty lead to trade increase among member countries (Lejour and de Mooij, 2004, 97). Increase in trade among member countries leads to efficient resource use, decrease in production costs, and increase in living standards etc. According to El-Agraa (2001) and Salvatore (2001), the most commonly cited dynamic effects consist of: increased competition, technological innovation, and economies of scale, increase in investment, increase in economic growth and better utilization of production factors. 

     When internal trade is freed among member countries, companies witness to increasing competition pressure. In other words, they do not enjoy benefits of high tariff walls any longer. Increasing competition pressure forces companies to use resources in an efficient way and decrease costs in order to exploit wider market opportunities. As a result of this overall process, living standards of a country increase. 

 Increased competition and enlarged market opportunities stimulate development and use of new technologies. Development and use of new technologies increase productivity, decrease costs, increase comparative advantage, improve living standards, and so on. 

     Wider market opportunities enable firms to take advantages of economies of scale, which in turn increases productivity, decreases costs, increases comparative advantage etc.

     Enlarged market opportunities, increasing national income per capita, and increased production productivity lead to increase in investments. Increase in investments results in higher economic growth rates.

     Increasing movements of labor and capital lead to better utilization of resources, thereby increases productivity, decreases production costs, increases benefits of customers, and so on.   
 

4. The Effects on Tax Revenues without Accession

In general, the effects of without integration scenario on tax revenues may be lower by taking into consideration the effects of accession to the EU on tax capacity and tax revenues. Unless accession to the EU,  Turkey can not secure the benefits of common market advantages such as, trade creation, economies of scale, investment increase, economic growth increase and better utilization of production factors. Therefore, as a result of this overall process contraction of Turkish tax base is expected. As a result of this, tax revenues in Turkey may be lower.

On the other hand, some improvements in tax revenues can also be expected without accession to the EU. If Turkey chooses free trade areas option instead of custom union and common market options, improvements in taxable capacity and tax revenues may occur. Improvements in taxable capacity and tax revenues are realized with greater flexibility in formulating tariff policy and trade deflection (Truong and Nash, 1979:315-316)        

5. The Effects on Tax Revenues with Accession

     The effects of accession to the EU on tax revenues vary depending on how accession affects the determinants of taxable capacity. In other words, the more the effects on the determinants of taxable capacity, the more the effects on tax revenues. Taxable capacity refers to taxable economic potential of a country (Nadaroğlu, 1998:290). Taxable capacity of a country depends on some variables. The most commonly cited variables of taxable capacity are: Per capita income level, the openness of an economy, the relative sizes of sectors and tax administration effectiveness (Gemmel, 1989:278). If these variables have high values, increase in taxable capacity and tax revenues gets more.

     As mentioned above, free internal trade , increased competition, economies of scale innovation, increase in investments and economic growth  trigger off increase in national income because these factors increase productivity, decrease costs, increase efficient use of resources, which in turn increase national income and  national income per capita. If national income or national income per capita of a country increases, taxable capacity of a country increases, as well.  Therefore, the effects of accession to the EU may have positive effects on national income per capita and taxable capacity. Therefore, Turkey’s accession to the EU may increase tax revenues regarding to national income per capita and taxable capacity. On the other hand, Turkey’s accession to the EU sometimes may have adverse effects on tax revenues. Elimination of tariffs for a free internal trade may lower tax revenues. For example, elimination of tariffs lowers revenues of protected sectors, which in turn decrease revenues expected from income taxes and social security contributions (Barreix and Villea, 2003: 9). 

     Mobility of labor from country of origin may have negative or positive effects on taxable capacity and tax revenues. According to Javanovic (2001), possible losses and gains from labor mobility stem from immigration.  He states that productivity losses and decreases in national welfare, taxable capacity and tax revenues are expected in case of experienced and educated migrants. In addition, if migrants come back to country after a long staying period, they become a potential customer, thereby tax base and tax revenues of home country decrease. On the other hand, if migrants can transfer important savings to home country, investments increase, employment increases and national income or national income per capita increases. As a result of this process, taxable capacity and tax revenues increase. 

     If capital mobility increases due to attractiveness of wider market opportunities, elimination of barriers etc. increases in investment, employment, national income or national income per capita are realized. Therefore, taxable capacity increases and tax revenues increase as a result of increase in taxable capacity.

     With accession scenario, economic and political stability in Turkey increases. Increasing economic and political stability boosts investments, increases employment, and increases national income or national income per capita. Therefore, according to the accession scenario, increase in national income per capita in Turkey is expected. For example, SPO’s (State Planning Organization) study (2004) reveals that Turkey’s national income per capita would increase from 15.1 % of the EU-25 average in 2004 to 22.9% of the EU-25 average and 29.7 % of the EU-25 average in 2020 respectively.  As a result of this, taxable capacity and tax revenues in Turkey may increase.

     In general, accession to the EU increase openness, which in turn may increase taxable capacity of a country because increase in openness boosts revenues from export and import taxes. However, increase in openness may, sometimes, decrease taxable capacity of a country if a country tries to access to an economic integration like the EU. Elimination of tariffs decreases potential revenues from export and import taxes. The magnitude of this negative effect varies depending on the share of duty free internal trade in total trade (Truong and Cash; 1979: 314). Therefore, the more internal trade share is in total trade, the more adverse effects are on tax revenues in respect of export and import taxes. Looking at the trade numbers, the share of internal trade in total trade seems quite high. For example, the export share of Turkey with the EU 15 is around 52% (Mooij, 2005: 92). On the other hand, the import share of Turkey is around 45% (SPO, 2003: 21). This implies that more integration with the EU lowers revenues of taxes on foreign trade.  On the other hand, the openness of economy may make important contributions to tax revenues in the form of income tax, corporation income tax and social security contributions (Hinrisch, 1965:556). As a result, the net effect of the openness on tax revenues depends on which effect outweighs the other. It may be positive, neutral and positive. If increase in income tax revenues, corporation income tax revenues and social security contributions outweighs decreases in export and import tax revenues, the openness increases tax revenues. If increase in income tax revenues, corporation income tax revenues  and social security contributions equals to decrease in import and export tax revenues, the net effect is neutral. If increase in income tax revenues, corporation income tax revenues and social security contributions is lower than decrease in export and import tax revenues, the net effect is negative.  If increase in income tax revenues, corporation income tax revenues and social security contributions outweighs decrease in foreign trade taxes, the effects of  Turkey’s accession to the EU have more positive effects on taxable capacity and tax revenues.

     Decrease in the relative size of agriculture is regarded an increase in taxable capacity due to difficulties stemming from taxing agriculture sector.  The first priorities of people in developing countries are food, clothing and shelter due to low national income per capita and as a result of this, concentration of production is in agriculture (Todaro; 2000: 58). However, since national income per capita increase with development, it expected that the first priorities of any person will change. People may not give priority to food, clothing and shelter any more as people are in less developed countries. Therefore, concentration of production in agriculture may lessen and taxable capacity and tax revenues may increase. Given the increase in national income per capita stemming from the likely effects of accession to the EU, decrease in relative size of the agricultural production is expected. Consequently, the taxable capacity and tax revenues of Turkey may increase. For example, Çakmak and Kasnakoğlu’ study (2001) supports our conclusion. Their study conveys that the loss in agricultural production of Turkey with accession scenario would be 10.1% of agricultural production without accession.  

      On the other hand, in respect of tax administration effectiveness, Turkey has a disadvantage to raise tax revenues. The main factors lie behind this fact are: the fragmentation of tax collection powers into departments that do not communicate with each other, inadequately recruited, poorly trained and blatantly underpaid and under motivated tax administration personnel, insufficient computerization of the tax administration and insufficient tax penalties (Bulutoğlu, 1987: 381-385). If Turkey wants to increase taxable capacity and tax revenues, Turkey has to overcome such mentioned obstacles.   

6. Conclusion

Theoretical reasoning and some empirical evidence reveals that Turkey’s accession to the EU has effects on taxable capacity and tax revenues. The magnitude of effects on taxable capacity and tax revenues vary depending on effects on the determinants of taxable capacity. As mentioned in this study, accession to the EU may, sometimes, have positive and negative effects on the determinants of taxable capacity. It may be positive neutral and negative depending on the net effect. If positive effects outweigh negative effects, the net effect is positive. On the other hand, if negative effects outweigh positive effects, the net effect is negative. Compared with accession scenario, some little benefits on taxable capacity and tax revenues can also be obtained without accession.  
 

Resume

S. Sami TAN: Assist.Prof., Faculty, Department of Public Finance, Economics and Administrative Sciences at Biga, Çanakkale Onsekiz Mart University. BA (Istanbul University, Turkey), MA (Istanbul University, Turkey, University of Connecticut, USA), Ph.D. (Dokuz Eylul University,Turkey). He is author of many articles on economic issues. His research interests include: Agricultural economics, environmental and resource economics, market failure, taxation and development studies. Tel: 00 90 3358738 -1134. E-mail: ssamitan@comu.edu.tr    

Address: Çanakkale  Onsekiz Mart Üniversitesi (Canakkale Onsekiz Mart University), Biga Iktisadi ve İdari Bilimler Fakültesi Maliye Bölümü, Ağaköy Yerleşkesi  Biga / Canakkale 17200

Tel : 00-90-286-3358738-39-1234

Fax : 00-90-286-3358736

e-mail :ssamitan@comu.edu.tr 

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