Extended Summary

Wages are an element of income according to the Income Tax Law No. 193. Basically, the income levied on the declaration can be assessed in different ways depending on the elements it contains. Wages are also generally levied by declaration and accordingly, the employer who employs a worker, in the capacity of tax officer, declares the gross wage of the worker to the tax office and pays the tax on behalf of that worker to the tax office. Theoretically, in this relationship, the worker is the taxpayer and the employer is the tax contractor. Income tax deducted from the gross wage of the wage earner is deducted at the source before it is received by the worker through withholding. On the other hand, for those who earn more than one wage income or other elements of income, income tax is calculated over the annual net amount of their declared income.

While the employer is responsible for taxes deducted from wages, the taxpayer is the employee who receives the income. Employees do not psychologically feel the pressure of the tax they pay, as the tax paid by deducting the employee’s gross wage is not received by the employee. In practice, a worker is not concerned with what his gross wage is, but with the money he will receive, that is, with his net wage, and supplies his workforce accordingly. However, this is not the case for employers. Since the taxes withheld by the withholding method are paid by the employer on behalf of the workers, employers come under the psychological pressure of the taxes they pay on behalf of their workers. For this reason, when dealing with who pays the tax on wages, wage tax (labour tax) is encountered, and when dealing with who pays this tax, employment tax (employment tax) is encountered. The psychological pressure caused by employment taxes is a factor that changes employers’ investment and employment decisions. On the other hand, this situation for employers increases labor costs, reveals important problems such as tax evasion, informal economy or under-the-counter production.

Income Tax paid on behalf of workers is just one of the costs that employers have to bear in return for labor demand. Apart from this, there are other direct costs among the costs that employers have to bear for each worker employment, and they are certain as they are determined by laws. Direct costs consist of (i) wages paid to the worker, (ii) income and stamp taxes, (iii) employee and employer social security deductions and (iv) unemployment insurance deductions. Those excluding the wages paid to the worker are called tax wedges. The tax wedge is defined as the legal obligations other than the net wage that the employer has to bear due to the employment of each worker. The tax wedge can also be expressed proportionally by dividing the sum of the tax paid for the worker and the social security deduction by the total cost of the worker to the employer. Indirect costs incurred by employers are not included in the tax wedge. For example, private vehicle or personnel service provided for the use of the worker, food service provided at the workplace, in-kind aids, workers’ clothing and equipment, severance pay expenses are not included in the definition of tax wedge.

Apart from the introduction and conclusion sections, this study is structured in three parts. In the first part, the tax wedge in Turkey will be compared with the OECD data and the situation will be determined by determining the prominent differences. In the second part, it will be discussed how the tax wedge is calculated over the minimum wage and a different wage level based on the data of 2020, and the effect of the wage increase on the tax wedge will be evaluated. In the third part, the differences that the minimum wage exemption made at the end of 2021 on the tax wedge will create as of 2022 will be examined over different wage levels, again the minimum wage, and it will be evaluated how the minimum wage exemption, which is a tax advantage, will affect the worker and the employer.