The Political Economy of the Taxation of Individuals in North Cyprus

Amin Sokhanvar (), Glenn Jenkins () and Hasan Ulas Altiok ()
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Amin Sokhanvar: Department of Economics, Eastern Mediterranean University, North Cyprus
Hasan Ulas Altiok: Department of Banking and Finance,Eastern Mediterranean University, North Cyprus

No 2019-01, Development Discussion Papers from JDI Executive Programs

Abstract: The objective of this study is to undertake a diagnostic of the personal direct tax system and the charges that are levied for the funding of the social security and the provident fund in North Cyprus. This analysis was conducted using a data base that included 100% of the individual tax payers. Particular attention was given to the assessment of the marginal tax rates on labor income and how they might affect fiscal compliance. It was found that the design of the tax system and its interaction with the systems of social security and provident fund contributions have created a powerful set of incentives for non-compliance. Top income earning employees in the private sector face a very high combined marginal fiscal burden. As a consequence, massive tax avoidance takes place so that most private employees pay no marginal income tax, social security or provident fund contributions on income above the minimum wage. In addition, the private self-employed allocate their wage incomes so as to minimize the total burden of social security, provident fund contributions plus individual and corporate income tax payments of their businesses. These very high marginal rates at levels of income that are low (by developed country standards) have created informal administrative measures to alleviate the fiscal burden on individuals. The end result however, is neither equitable nor economically neutral.

Keywords: Pensions funds; personal income tax; tax incidence; tax compliance; fiscal equity (search for similar items in EconPapers)
JEL-codes: H24 H26 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2019-01
New Economics Papers: this item is included in nep-iue, nep-pbe and nep-pub
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Working Paper: The Political Economy of the Taxation of Individuals in North Cyprus (2019)
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