Indirect Taxes, Social Expenditures and Poverty: What Linkage?

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We shed light into the empirical relationship between social expenditures and poverty for Turkey over the period 1975- 2005. We estimate first a series for the headcount indexwhich is not exactly known due to measurement problems in countries such as Turkey, where the degree of unrecorded economy is higher. For this purpose, employing Kalman filtertechnique, we use social expenditures, public income and interest payments in our model. Then, cointegration analysis is used to investigate the relationship between the estimatedheadcount index and the share of indirect taxes in the total tax income. The study concludes that: first, the portion of poor population increases and it reaches 17.6 percent in2005; second, social expenditures increase thanks to the rise in public income which is realized by the relative increase in the share of indirect taxes in total tax revenues. This policyimpedes in the long run poverty reduction; and third, the increase in this share leads to a higher headcount index.

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Poverty , taxation , kalman filter , Turkey

Ege Academic Review (EAR)

349

Ege Academic Review (EAR)