Gov’t revenue rises with crackdown on informal economy

Long hovering near 50 percent of gross domestic product (GDP), the country's underground economy was estimated at just 37.5 percent of GDP in the latest economy-wide report by the Turkish Statistics Institute (TurkStat). The decrease, which the report registered at nearly 4 percent per year over the last five years, comes amid a stricter regulatory environment and a wave of audits conducted by the Ministry of Finance. Government audits have forced many of the country's under-the-radar firms, which employed an estimated 5.8 million workers at the beginning of 2012, to pay stiff fines for tax evasion and to register employees for the country's compulsory social security program.

The TurkStat study registered impressive gains in the number of workers registered for social security over the past two years, recording 18 million of Turkey's estimated 23.8 million employed as paying contributors to the state pension program. In 2010, the number of paying contributors was 16 million. The government has made increasing tax revenues by bringing underground firms onto the government's radar a key component of its economic policy, with Prime Minister Recep Tayyip Erdoğan saying in 2011 that reigning in the informal economy would allow the government to keep tax rates low. Estimating the informal economy at “40-45 percent of (Turkey's) national economy” in May of that year, the prime minister said that the government would “not engage in efforts to collect more taxes if this country becomes more powerful” and called for “more sensitivity from employers on this issue of the informal economy.” Erdoğan's call was specifically directed at the construction and textile industries, known as long time hold-outs against government regulation. According to the prime minister, just 400,000 of Turkey's 2 million textile workers were registered with the state and paid into social security coffers in 2011.

The Social Security Institution (SGK) estimates that an additional TL 26.5 billion would be paid into the government's social security program every year if the informal economy were completely brought under regulator's control, predicting that the government can continue to increase registration by keeping taxes low and continuing its wave of audits in notoriously tax-averse sectors. TurkStat estimates that Turkey's informal economy dipped from 45 percent of total national employment in 2008 to roughly 42 percent in 2010. By 2011, that number was registered at 40.9 percent, a number that dipped to 37.5 percent in the board's latest rankings.