Inflation and Cold Progression: An Analysis of Turkish Income Tax between 2006-2021

Abstract

Inflation causes high taxation -although real income does not increase- because the income tax base targets nominal income. This situation results in taxation as if the ability to pay has increased, although it has not. Compensation for this deflecting effect of inflation in the income tax tariff requires growing the income segments included in the tariff at the rate of inflation regularly experienced yearly. However, the current need for public revenue can cause governments to make regulations in favour of the administration and against taxpayers -almost by creating an undervaluation- while providing this requirement. It is called "cold progression" in the literature. In this study, which draws attention to the distortions caused by inflation in the tax system, the evidence obtained shows the existence of cold progression.