A cyclical analysis of the relationship between income tax and unemployment: Empirical evidence for Türkiye

Abstract

Increasing tax revenues is very important for states. Among the crucial topics that require investigation in this context is the impact of certain macroeconomic variables on revenue from taxes. This study investigated the impact of Turkey's income tax revisions on the country's unemployment rate. From 2005 until 2023, information from the Ministry of Treasury and Finance's and the IMF's online databases was used for the study. The Breitung-Candelon Frequency Domain causality test was used to determine the periodic causality relationship between variables, the ADF unit root test was used to analyze unit roots, the ARDL bounds test was used to determine the long-term cointegration relationship, and the long-term coefficient was used to determine the direction and strength of the independent variable's effect on the dependent variable estimators. As a result of the research, it was determined that income tax has an effect on unemployment in the short, medium and long term. Additionally, unemployment affects income tax in the medium and long term. Finally, according to the results of OLS, FMOLS and CCR, which are long-term parameter coefficient estimation tests, the coefficients of the income tax variable were statistically significant in all estimators and it was seen that the income tax level and the unemployment level had a positive interaction. Thus, raising income taxes eventually results in higher unemployment in long term.