An Empirical Application On The Effects of Tax Burden, Inflation and Expectations of Tax Amnesty On Informal Economy (1985-2012)

Informal economy refers to all economic transactions and activities that are entered in official records, can not be documented through legal documents and are not taken into account in calculations of Gross Domestic Product (GDP). The fundamental reasons for the emergence of informal economy can be subsumed in four groups. These; Financial and economic reasons such as excessive tax burden, inflation, economic instability and crises Administrative and legal reasons such as tax amnesties, corruption, bribery and inadequacy of public accountant services Social and psychological reasons such as migration to cities, lack of confidence and shortcomings in population policies Political reasons like political instability and populist policies. Despite all these negative factors leading to informal economy, there is not complete consensus about whether informal economy affects economic growth positively or negatively. In spite of this state of affairs, some policies should be developed to prevent informal economy. Among these policies are reducing interest rates, making some reforms in the taxation system, reducing the share of indirect taxes within the total taxes, bringing the taxes on employment to a minimum, raising an awareness about taxes and preventing political instability. This study investigated the relationship between informal economy and tax burden, inflation and tax amnesties on the basis of the annual data between the years 1985 and 2012. The informal economy data used in the study were calculated using the extended monetary ratio. The reason why we used this variable is that, within the calculations made using the monetary ratio methods, the extended monetary ratio method calculates informality by incorporating drawing accounts into the model in addition to cash businesswhile calculating informal economy. The tax burden data, on the other hand, were calculated by the ratio of the total tax revenues to the Gross Domestic Product and the data were obtained from the website of the Finance Ministry. Consumer prices index values were taken from the data base of The Turkish Statistics Institute. Tax amnesties were included in the model as dummy variable on the basis of the periods when the tax laws took effect. As a result of the econometric model that was constructed, first the stability of the data was determined and then the relationship among the variables was revealed through regression equation. The causality test that was conducted indicated at a significance level of 10 % that tax burden was a reason for informal economy and variations in inflation rates affected tax burden. The overall situation obtained from the econometric results shows that regulations should be made aimed at alleviating tax burden, ensure stability of prices and eliminating expectations of tax amnesties in order to reduce informal economy.