The Haldun-Laffer curve synchronisation: The case of Turkey 1964-2022

Taxes play a significant role in government revenues. For this reason, researchers have always debated what the ideal tax rates should be. Many economists have explored the optimal tax rate maximizing government tax revenue while remaining affordable for taxpayers. Ibn Khaldun is the first thinker to address this issue. In his 14th-century work Muqaddimah, he argues that excessively high tax rates would reduce tax revenues. Later, supply-side economist Arthur Laffer takes up this issue and proposes that tax revenues increase up to a certain point as tax rates rise, but after exceeding this point, further rate increases cause tax revenues to decline. Numerous studies in literature have analyzed this topic, with findings varying according to the economic, political, and social conditions of each country. This study focuses on the Khaldun-Laffer curve to determine the tax rate that would produce the highest percentage increase in tax revenues for Turkey. The study uses Beenstock's (1979) model, incorporating inflation and interest rates as control variables. The data spans from 1964 to 2022, and the model is estimated using the ordinary least squares (OLS) method. The findings reveal that a 1% increase in the tax rate boosts tax revenue growth by 0.03%. Similarly, a 1% rise in inflation supports a 0.002% increase in tax revenue growth. The coefficient of the squared tax rate is -0.0011, consistent with the inverted U-shape of the curve. This confirms that raising the tax rate excessively negatively affects the annual growth rate in tax revenues for Turkey during the studied period. Apart from the interest rate parameter, the results are statistically significant. Given that the Khaldun-Laffer curve takes an inverted U shape, it is known that the peak provides the tax rate maximizing the increase in tax revenues. By applying the coefficients obtained from the OLS analysis to the formula for the peak (-b/2a), the study concludes that the tax rate maximizing the annual growth rate in tax revenues for Turkey between 1964 and 2022 is 15.23%.