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Turkey's Brutal WWII-Era Wealth Tax

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  • Turkey's Brutal WWII-Era Wealth Tax

    Copyright 2005 Tax Analysts
    Tax Notes International Magazine

    September 5, 2005

    by Cathy Phillips, editor of Tax Notes International

    The voluntary tax systems of the United States and many other countries
    aren't perfect, but they sure beat the heck out of the alternative.
    Consider, for example, life under a regime where tax rates aren't made
    public, assessments are arrived at in secret, and failure-to-comply
    penalties include banishment to forced labor camps.

    This week we present a fascinating article by DAVID JOULFAIAN on a
    wealth tax adopted by Turkey in 1942 that included all of the above
    unpleasantries. In the midst of World War II, Turkish citizens also were
    victims of a monstrous tax system that they were powerless to change.
    Joulfaian describes the discriminatory nature of the wealth tax, a
    lopsided levy shouldered by the minority Christian and Jewish
    populations in the predominately Muslim nation, and the misguided fiscal
    policies that allowed the tax to take root in the first place (p. 915).



    Wealth taxes are common in many countries, and represent one of the
    oldest forms of taxation. Local governments in the United States, for
    instance, levy annual property taxes. Annual wealth taxes are levied in
    several European countries as well. The estate tax is the only wealth
    tax levied by the U.S. government and applies to wealth held at death.
    The wealthy are at times also taxed at progressive tax rates on their
    earnings in addition to being exposed to wealth taxes. Governments levy
    those taxes to diversify their sources of revenues, augment and protect
    the income tax base, and regulate the distribution of income and the
    concentration of wealth. Governments may resort to additional taxes in
    times of national emergency.

    A general guiding principle for any tax system is that it should be
    sufficiently transparent to enable a taxpayer to construct the size of
    wealth or income subject to tax, as well as the ensuing tax liability.
    For local property taxes, for instance, cities inform property owners of
    the assessed value of their real estate and the amount of tax they owe.
    For income and estate taxes, taxpayers report the amount of income
    received and the size of terminal wealth to the government. Once the
    taxable amount is established, a tax rate schedule is applied to
    determine the tax liability. Taxpayers are able to appeal assessments
    and are given adequate time to prepare their documents and make
    provisions for paying the amounts owed.

    A student of taxation may encounter many fascinating features of the
    various taxes levied throughout history, dating back to ancient Egypt
    and the Roman Empire. Yet no tax system rivals the peculiarities of a
    tax employed in the middle of the 20th century. On the morning of
    November 12, 1942, the citizens of Turkey woke up to the most draconian
    wealth tax ever envisaged. While the tax in theory applied to the entire
    predominantly Muslim nation, in practice much of its burden rested with
    the minority Christian and Jewish communities who primarily resided in
    Istanbul, formerly known as Constantinople. Neither the rate of taxation
    nor the taxable base and its derivation were made public. Tax
    assessments were arrived at in secret, and individuals were directed to
    settle their government assessed liabilities within two weeks, without
    any appeal provisions in place. The penalty for Christians and Jews who
    failed to do so within a month was deportation to forced labor camps in
    eastern Turkey in addition to having their property confiscated. The tax
    was initially also extended to Christian and Jewish schools, as well as
    to churches and synagogues, but not to Muslim institutions, because they
    were owned or funded by the government. As documented by Faik Okte, the
    Turkish Ministry of Finance official in charge of implementing the tax,
    assessments were determined arbitrarily because the authorities lacked
    information on the income and properties of the minority groups./1/

    Table 1: Statutory Tax Rates

    Provision Applied to Applied to
    Rate on wartime profit Muslim Turks Non-Muslims
    12.5 percent 50.0 percent
    Additional tax zero Up to 50 percent of personal wealth

    Source: Faik Okte, The Tragedy of the Turkish Capital Tax.

    Description of the Tax

    The Turkish National Assembly passed the tax on November 11, 1942
    (Law 4305/12.11.1942), and its decision to levy the tax was published
    the next day in the government official newspaper, Resmi Gazete. The
    details of the structure and inner workings of the tax were kept secret
    by the government. The details, however, were revealed and made public
    some five years after its enactment in a book authored in 1947 by Okte.
    In that book Okte also traced the architects of the tax and named all
    the governmental agencies and personnel engaged in administering the

    In an otherwise officially secular state, taxpayers were classified
    as Muslim and non-Muslim, denoted with the letters M and G,
    respectively./2/ The latter included Jews and Christians, including
    Armenians and Greeks. Assyrian Orthodox Christians also fell in that
    class. An additional class of taxpayers were the Donme, denoted by D.
    The Donme were Jews whose ancestors had converted to Islam in the 17th
    century./3/ Like the Jews and Christians, the Donme were taxed at rates
    higher than those that applied to Muslims. Foreigners were taxed at the
    same rate as Muslim Turks.

    During that period, Greeks were the largest minority group in Turkey,
    and represented the heirs to Byzantium with Constantinople as its
    capital. The Armenians originated from western Armenia or the eastern
    half of Turkey, and represented the descendants of the first Christian
    nation. The presence of the Jews also predates that of the Turks, whose
    ranks had been augmented by Ladino Jews from Spain during the
    Inquisition. The Assyrians are originally from southern Turkey and
    modern-day Syria and Iraq; their presence also predates the arrival of
    the Turks from central Asia. Combined, those non-Muslim groups made up
    less than 1 percent of Turkey's population of 18 million in 1942.

    The tax was initially envisaged as a tax on capital or wealth. It was
    to apply to businesses and real estate (immovable property). By the time
    it was enacted, it had expanded to include a tax on wages as well that
    effectively applied only to non-Muslims in Istanbul. Taxpayers were
    classified according to business type and property earnings. Within the
    Ministry of Finance, once the size of income, wealth, and type of
    enterprise were established internally, local assessment boards secretly
    determined the amount owed by the taxpayer.

    The Finance Ministry was responsible for setting the tax rates to be
    used in computing tax assessments. Minorities were generally to be taxed
    at 5 to 10 times the amount applied to Muslims with similar wealth.
    Specifically, Muslims were to be taxed at the rate of 12.5 percent of
    profits or earnings. In contrast, non-Muslims were to be statutorily
    taxed at the rate of 50 percent of earnings plus an additional tax of up
    to 50 percent of their wealth (Table 1)./4/ The reach of the tax also
    extended to hospitals and educational institutions. The tax did not
    extend to Muslim institutions, because they were owned or funded by the

    While internal "guidelines" set minimum and maximum limits, the local
    boards at the Finance Ministry were free to choose any amount in
    between. Indeed, they had complete discretion in setting assessments.
    Information on income and wealth were obtained from Turkish national
    banks, the Republican People's Party, and the Security Directorate,
    which is equivalent to the U.S. FBI. Despite the lack of information on
    the sources of wealth and income, taxpayer records were not requested or
    considered when setting assessments.

    Table 2: Initial Assessments in Istanbul (Constantinople)

    Group Number of Taxpayers Amount (TRL millions)
    Extraordinary Rich
    Muslims 460 17.3
    Non-Muslims 2,563 190.0
    Those With Earnings Statements
    Muslims 924 3.1
    Non-Muslims 1,259 10.4
    Profit Tax on Gross Earnings
    Muslims 2,589 4.0
    Non-Muslims 24,151 72.8
    Wage Earners
    Muslims -- --
    Non-Muslims 10,991 6.9

    Subtotal 42,937 304.5
    Muslims 3,973 24.4
    Non-Muslims 38,964 280.1

    Source: Faik Okte, The Tragedy of the Turkish Capital Tax.

    The assessed tax was due in cash within 15 days from its published
    date of December 17, 1942. Payments could be postponed for another 15
    days, but would face a charge of up to 2 percent interest. If the tax
    due was not fully settled within 30 days of assessment, the taxpayer's
    property was to be confiscated. Furthermore, the taxpayer was to be sent
    to a labor camp until his debt was discharged, under Regulation 21/19288
    approved on January 12, 1943.

    The Taxpayers

    By August 1943 the tax assessments stood at some TRL 335 million in
    Istanbul alone, or about one-half the entire currency in circulation.
    Indeed, those assessments represented as much as the entire budget
    revenues of TRL 394.3 million for 1942 before enactment of the tax.
    Table 2 provides a summary of the number of taxpayers assessed and the
    amount of assessments in Istanbul. Some 42,937 taxpayers were assessed a
    total of TRL 305 million, as shown in Table 2./5/ Of those, only 3,973
    were Muslims, who were assessed a total of TRL 24.4 million. In other
    words, minorities who made up less than 1 percent of the population were
    assessed 93 percent of the liability. Table 3 further provides
    assessments for churches, synagogues, and schools./6/

    In a survey of foreign chambers of commerce at the time, C.L.
    Sulzberger, writing for The New York Times in 1943, documented the
    discriminatory nature of the tax./7/ As illustrated in Table 4, the
    effective rates of assessments that merchants faced varied considerably
    from a low of under 5 percent for Muslims to over 150 percent for
    Christian Greeks and Jews, to well over 200 percent for Christian
    Armenians. Similarly, in one large enterprise, only 1.2 percent of the
    Muslim employees were assessed compared with 96.1 percent for minority

    As illustrated by the head of the Finance Ministry and the person in
    charge of implementing the tax, Faik Okte, assessments were determined
    in arbitrary manners because the authorities lacked information on the
    income and properties of the minority groups./8/ The arbitrary nature of
    the tax is best illustrated in the treatment of the "extraordinary
    rich." According to Okte, Mr. Bezmenler, whose ancestors converted from
    Judaism to Islam in the 17th century and who was classified as a Donme,
    was assessed TRL 1 million. In contrast, Dr. Cudi Birtek, an
    extraordinarily wealthy Muslim, was assessed only TRL 25,000, a mere
    fraction of the amount applied to the Donme./9/ In yet another example,
    Osman Sakar, K.S. was originally assessed TRL 120,000. When Mr. Sakar
    proved that he was a "pure Turk" or a Muslim, his tax liability was
    adjusted downward to TRL 12,000 -- just 10 percent of the originally
    published amount./10/ Those mistakes were not uncommon because all
    citizens were forced to adopt Turkish-sounding surnames in 1935 and
    because Turks have come to resemble more the Caucasians they conquered
    and less their Asiatic ancestors from central Asia.

    Table 3: Tax Assessments of Minority Institutions

    Christian and Jewish Institutions/*/ Number Assessment (TRL)
    Schools 88 227,550
    Churches and Synagogues 27 119,200
    Hospitals 7 86,750

    /*/ Zero assessment for Muslim institutions, which numbered in the thousands.

    Source: Faik Okte, The Tragedy of the Turkish Capital Tax.

    The discriminatory and confiscatory nature of this tax is also
    evident in the treatment of non-Muslim institutions. According to
    Sulzberger, a poorly equipped Armenian hospital in Istanbul, for
    instance, was assessed TRL 39,000 compared with an assessment of TRL
    2,500 for a modern and thriving American hospital. Muslim institutions
    avoided taxation altogether./11/

    Tax assessments were seriously flawed in particular because they
    failed to consider any documents from the taxpayer. The tax due from a
    Christian Armenian timber merchant, for instance, was three times his
    entire fortune. The tax administrator informed him that his deportation
    to the labor camp could not be prevented, even after all his wealth had
    been confiscated./12/ At times the tax burden widely diverged in its
    arbitrariness. A Jewish taxpayer had his tax assessment increased simply
    because he argued with an assessor. In another example, a Christian
    Armenian "was taxed excessively at the rate of TRL 400,000," reflecting
    "the false allegation that he was the leader of the Armenian Tashnag
    Society, an old member of the Union and Progress Party," better known in
    the West as the Young Turk regime that governed Ottoman Turkey from 1909
    through the end of World War I./13/ At the other extreme, another
    Armenian was exempted from the labor camp because he had written
    "favorable articles promoting Turkish interests in the French

    The punitive nature of the tax was at times also extended to
    foreigners. While foreigners were supposed to be taxed at the same low
    rate as Muslims, many in fact were taxed at the higher rates that
    applied to minority citizens. According to Faik Okte, the principal
    administrator of the tax, that treatment was deliberate. He reports that
    tax administrators were instructed to deny the foreigners' "privilege"
    to Jews from the Axis states./15/ In addition, and under "the pretext of
    the poor registration system," the property of Greeks and Armenians who
    had acquired foreign citizenship was immediately auctioned off./16/

    Of the first 45 deportees to labor camps, 21 were Jews, 13 were
    Greeks, and 11 were Armenian. After the first deportation, it was
    decided that the "elderly, women, the sick, foreign residents . . .
    would not be exempted from the forced labor obligations."/17/ However,
    there are no records of any women or foreigners ever sent to labor

    Table 4: Effective Tax Rates by Religious and Ethnic Affiliations

    Merchants by Affiliation Tax Rates (percent)
    Muslim 4.94
    Greek Orthodox 156.00
    Jewish 179.00
    Christian Armenian 232.00

    Source: C.L. Sulzberger, "Turkish Tax Kills Foreign Business,"
    The New York Times, Sept. 11, 1943.

    Concluding Comment

    Shortly after the government published its declaration to levy the
    wealth tax, a Turkish professor contacted the Finance Ministry to
    inquire about the details of the new tax. "Have you all gone mad?" was
    his response after confirming that the new law did not provide for
    appeals nor did it indicate rate of taxation./18/ Despite its insanity,
    the tax shook the economy to its foundations.

    Many Muslims were enriched by acquiring non-Muslim property at
    bargain prices. However, those fire sales, or outright "confiscation" by
    state-owned enterprises, often hindered economic growth and
    entrepreneurship. Consider the case of the Banzilar and Benjamen
    Company, a shipping company owned by two Jews that was forced to turn
    over all of its five ships to the state-owned Maritime Lines in lieu of
    taxes totaling TRL 1.6 million. Despite the rising value of ships and
    Turkey's vast needs, those ships, which were productively employed by
    their previous owners, remained idle at port./19/ In another example,
    the majority of textile factory owners at the time were either Jewish or
    Donme converts from Judaism. Yet, after World War II and repeal of the
    tax, non-Muslim textile start-ups came to a screeching halt./20/

    The Turkish wealth tax was advanced as part of a strategy to control
    prices during the inflationary early years of World War II. The thinking
    was that the forced sale of property and inventory within a fortnight of
    the assessments would depress prices. Yet not only did that misguided
    strategy fail to depress prices, the discriminatory nature of the tax
    and the taxation of an entrepreneurial group to certain bankruptcy led
    to a serious loss of confidence in the state and rattled financial
    markets for years to come.


    /1/ Faik Okte, The Tragedy of the Turkish Capital Tax, translated
    from the Turkish Varlik Vergisi Faciasi by Geoffrey Cox, Croom Helm,

    /2/ G denotes Gayrimuslim, or "other than Muslim" in Turkish,
    borrowed from the Arabic ghayr Muslim.

    /3/ The Donme, which means "apostates" in Turkish, are the followers
    of the mystic Shabbetai Tzvi who converted to Islam on September 16,
    1666. Tzvi was arrested in Constantinople on December 30, 1665, after he
    announced that he would seize the crown of the Ottoman sultan and
    reestablish the kingdom of Israel.

    /4/ Okte, supra note 1, at 43. The wage tax was set at TRL 500 for
    those with monthly wages under TRL 100, TRL 750 for those with wages of
    TRL 101 to TRL 500, and so on.

    /5/ Plus another TRL 30 million when taxpayers with omitted
    affiliation are considered. See Okte, supra note 1, at 48.

    /6/ Okte, supra note 1, at 60.

    /7/ C.L. Sulzberger, "Turkish Tax Kills Foreign Business," The New
    York Times, Sept. 11, 1943, p. 7, column 1.

    /8/ Okte, supra note 1, at 33.

    /9/ Id. at 47.

    /10/ Id. at 62.

    /11/ Sulzberger, supra note 7.

    /12/ Okte, supra note 1, at 69.

    /13/ Id. at 47.

    /14/ Id. at 74.

    /15/ Id. at 37.

    /16/ Id. at 57.

    /17/ Id. at 72.

    /18/ Id. at 29.

    /19/ Id. at 95.

    /20/ See Edward C. Clark, "The Emergence of Textile Manufacturing
    Entrepreneurs in Turkey: 1804-1968" (Ph.D. dissertation, Princeton
    University, 1969).