The Khaldûn−Laffer Curve Revisited: A Personal Income Tax−Based Analysis for Turkey

Abstract

This paper focuses on an old but still discussed postulate, the Khaldûn-Laffer curve, and empirically applies it to personal income tax by using annual time-series data of Turkey for the period 1970-2015. From our analysis, two fundamental findings emerge: first, Turkish data provides evidence in favor of the Khaldûn-Laffer curve, suggesting that there is a non-linearity between tax rates and tax revenue. Second, the optimal tax rate that maximizes revenue from personal income tax is 15.03% against the current rate we estimate at 15.37%. These findings imply that Turkey’s current personal income tax rate falls slightly into the prohibitive range of the curve.
Overall, it is safe to argue that the current personal income tax rate should be lowered to its optimal value to maximize the revenue from personal income taxation. If done so, the Turkish fiscal authorities would be able to generate more revenue with a relatively lower tax rate.