Balancing the Tax Structure for Inclusive Growth: Evidence from Türkiye

This study investigates how the tax structure should be redesigned to promote inclusive growth in Türkiye. Inspired by the coexistence of growth with persistent high unemployment, inequality, and a tax system largely reliant on indirect taxes, the study asks whether different tax instruments have distinct impacts on inclusive growth and what kind of tax mix would be more inclusive. Using annual data for 26 NUTS-2 regions over 2014–2023, the study constructs a multidimensional inclusive growth index and estimates fixed-effects panel models with Driscoll–Kraay standard errors, complemented by robustness checks with an alternative dependent variable and spatial panel specifications that account for regional clustering. The results show that GDP per capita, human capital, financial inclusion, and low unemployment are strongly and positively associated with inclusive growth, while the aggregate tax burden is not statistically significant. In contrast, personal income tax is consistently negative and statistically significant, indicating that the structure of this tax places a disproportionate burden on formal low- and middle-income groups. Wealth-related taxes, although small in size, are positively associated with inclusive growth, whereas consumption-based taxes tend to have neutral or negative effects. Overall, the findings suggest that tax reform in Türkiye should ease the labour tax wedge at the bottom, broaden the personal income tax base toward higher and self-declared incomes, and make greater use of wealth taxes to finance regionally inclusive spending. The paper contributes by providing evidence from an emerging economy based on a multidimensional measure of inclusive growth and a detailed breakdown of tax instruments.