ECONOMY

Underground economy hampers Turk progress

ANKARA – To leave decades of financial trouble behind it, Turkey must undertake a long, painstaking reform process to fight a huge underground economy fueled by high taxes and unemployment, experts maintain. The European Union, which Turkey is seeking to join, and the OECD have both warned that the size of the country’s underground – or unregistered – economy is casting a pall on its remarkable recovery since a severe crisis in 2001. An OECD survey last week described Turkey’s parallel economy as «a major concern,» accounting for more than half of all labor and reducing the tax base of this cash-strapped country. The problem has been rampant for years, but critics say governments failed to take any genuine measures to encourage «ghost» companies to register and pay taxes. Estimates of the size of the underground sector range from 32 percent to 65 precent of the country’s gross national income, which stood at $197.2 billion in 2003. Analysts say high taxes and social security charges – well above the level of the richest OECD countries – plus red tape, corruption, poor state control and employees’ willingness to work illegally due to high unemployment has forced thousands of firms underground. A recent report by the Ankara Trade Chamber described Turkey as a «tax hell,» where investors are also scared off by the high price of vital necessities, such as oil and electricity. The corporate tax in Turkey is 33 percent. In addition, registered firms are subject to other taxes automatically withheld whether they make a profit or not. Employers also pay the bulk of their workers’ social security contributions: the cost to the employer of an employee working at the current minimum monthly wage of 318 million lira ($214, or 168 euros) is 540 million lira. Critics say governments have doubled the tax burden of companies over the past 15 years as an easy way of boosting revenues instead of taking measures to expand the tax base. «The tax system is not fair. The state taxes whoever it can grab,» said Sadik Kirbas, head of Istanbul’s Okan University and a researcher on the informal economy. «Reducing tax rates is not easy either because the government cannot afford a decrease in revenue while it is under pressure from the IMF to meet tight budget targets,» he added. Registered companies often resort to fraud to ease the tax load. «As far as I can see, nobody declares their real revenue,» said an Ankara-based financial consultant who works mainly with small companies. «We turn a blind eye because this has become the rule. The system is deadlocked.» Kirbas suggested that the real remedy would be a far-reaching structural reforms aimed at transforming small-scale companies, which constitute 90 percent of all firms in Turkey and are «extremely difficult» to control. Bulent Pirler, secretary-general of Turkey’s main employers’ union, TISK, said the reform process should be gradual and take social factors into consideration because the underground economy became a «buffer zone» during the economic crisis, when scores of companies collapsed and thousands of people were left jobless. «Many people went to work in the unregistered economy, giving up their social security instead of remaining broke,» he said. Pirler also said the government must overhaul its cumbersome bureaucracy.