The Tragedy of the Turkish Capital Tax Faik Okte Translated by Geoffrey Cox CROOM HELM London e Sydney e Wolfeboro, New Hampshire© 1987 Institute for Political Research and Studies Croom Helm Ltd, Provident House, Burrell Row, Beckenham, Kent BR3 1AT Croom Helm Australia Pty Ltd, Suite 4, 6th Floor,, 64-76 Kippax Street, Surry Hills, NSW 2010, Australia British Library Cataloguing in Publication Data Okte, Faik The tragedy of the Turkish capital tax. 1. Capital levy—Turkey IL. Title 336.24°209561 HJ4133.T9 ISBN 0-7099-1964-6 Croom Helm, 27 South Main Street Wolfeboro, New Hampshire 03894-2069, USA Library of Congress Cataloging-in-Publication Data Okte, Faik, 1902- The tragedy of the Turkish capital tax Translation of: Varlik vergisi faciasi 1. Capital levy — Turkey. I. Title. KKX3663.04813 1987 343.56105’245 86-24034 ISBN 0-7099-1964-6 345.61035245 Printed and bound in Great Britain by Billing & Sons Limited, Worcester.Contents List of Tables Foreword David Brown Preface 1 An Overview of the Prevailing Conditions 2 The Capital Tax 3 Memories Concerning the Implementation of the Tax 4 The Abolition of the Capital Tax 5 Some Thoughts on the Capital Tax vii xvii 87 92List of Tables 1.1 Distribution of profits tax 1944 1.2 Taxes collected from salary earners and other groups (TLm) 1.3 Other taxes and duties (TL’000) 1.4 Balance of Trade 1938-1943 (TL’000) 1.5 Official gold reserves 1938-44 (TL’000) 1.6 Volume of Trade (mt) and value (TL’000) 1936-44 1.7 Wholesale price of consumer goods 1940-44 (1938 = 100) 1.8 Currency in circulation 1937-44 (TL’000) 2.1 Levies imposed and categories and numbers of taxpayers 2.2 Petitions and categories of taxpayers 2.3 Rectifications in the district of Istanbul 2.4 Taxation of foreign residents (TL) 2.5 Taxation of foreign residents by nationality (TL) 3.1 First &roup of deportees 3.2 Tax figures for the entire country 3.3 Tax figures for Istanbul 4.1 Uncollected taxes by provinceForeword David Brown During the Lausanne Peace negotiations (1922-23), the Turkish delegation had wholeheartedly subscribed to the freedom of non-Muslims in Turkey to maintain their distinct religions. and cultures. These rights were enshrined in the minority clauses of the Treaty of Lausanne (articles 37-44). The principle of religions and ethnic toleration, however, went counter to the drive for Turkification and secularization so eagerly pursued by the Governments of Kemal Atatiirk and later on by his successor Ismet Inénii. The urge of Turkish nationalism and the cultural and institutional metamorphosis of the Turkish majority left little room for the religious, ethnic and linguistic self-assertion of the non-Muslims in Turkey. This was also partly the outcome of Ottoman/Kemalist ideology which drew a clear line between Muslim Turks and non-Muslim minorities. Traditional Ottoman society classified men essentially into Muslim and Zimmi— the believer and the subjected unbe- liever — with appropriate codes of conduct for each group. The millet’ structure of the Ottoman state _institutionalized differences between subjects into a distinctive form of gov- ernment administration. The impact of the Islamic/Ottoman heritage was to turn non-Muslim Turkish citizens into second class citizens, despite secularism and formal legal protections of the Turkish Republic. This bias was reflected in many measures adopted by the Turkish Govenment during the interwar period. Nationalist zeal, perhaps partly influenced by the formidable national socialist movements in Germany and Italy, led on several occasions to expressions of anti-semitic and anti-minority feeling during the 1930s. Thus, in 1934 the Ankara Government adopted law no. 2510 regulating the distribution and settlement of population in Turkey. According to this law, Eastern Thrace was included in the zone restricted to population of purely Turkish upbringing and education. The adoption of this law was followed by the forceful removal of the historic Jewish com- munities of Edirne and the Straits zone.? Amidst an intense ixFOREWORD anti-Jewish campaign orchestrated by the Turkish press, some eight to ten thousand Thracian Jews were forced to seek refuge in Istanbul within a couple of weeks in June/July 1934. Again, after the obligatory adoption of surnames by every Turkish citizen in 1935, pressure was brought to bear upon the minorities to adopt Turkish sounding surnames. Thus, Istanbul Jews, Greeks and Armenians were forced to give up their traditional surnames and adopt new ones. In a similar vein, in order to compel the minorities to adopt the Turkish language the ‘citizen speak Turkish’ (vatandag Tiirkce konus) movement campaigned for the enactment of stringent measures.‘ A bill was even put forward to compel the Jewish minority to speak only Turkish and in 1938 the British Ambassador in Turkey, Sir George Clerk, reported that ‘local Greeks and Jews were fired or blamed for speaking a non-Turkish language’. The deeply rooted suspicion of ethnic and religious minorities in Turkey was stimulated by the Ismet Inédnii Administration that took over the government after the death of Kemal Atatiirk in November 1938. Soon after the outbreak of World War II, the Turkish Government mobilized all Jewish, Greek and Armenian males between the ages of 18 and 45. Just about the time of the signing of the agreement between Turkey and Nazi Germany in June 1941, these men were sent to special camps in the interior of Anatolia each containing about 5000 men. There, the men were instructed to engage themselves in non-combative capacities such as roadbuilding. The con- centration of all non-Muslim males in such camps aroused great apprehension in minority circles in Istanbul. Their fears were intensified when reports of harsh conditions and the high mortality rate reputed to have prevailed in the camps, reached Istanbul.® But the mistrust of the Inénii Government towards the non-Muslim Turkish subjects was best illustrated during the Varlk incident. In an effort to channel discontent to an un- popular target, such as the non-Muslim minorities, Ankara placed the blame for the severe economic crisis of 1939-42 on the Jewish and Christian businessmen.” In this way, it was thought, the government would divert criticism and satisfy emotionally the hard-pressed Turkish masses. Meanwhile, the Turkish press launched a vitriolic anti-Jewish and anti-minority campaign.® When the Varhk assessments were eventually made publicFOREWORD the discrimination feared by many members of the minorities exceeded all expectations. The majority of the assessments levied on non-Muslims was set on confiscatory figures bearing no relation to declared profits or capacity to pay.” Practically no Muslim Turk suffered anything remotely comparable and those who did were almost exclusively members of the dénme com- munity, a group of Oriental Jews who in the seventeenth century had embraced Islam and became technically Turkified.'° The dénme group had made a distinct contribution to later Ottoman and Republican Turkish intellectual and pro- fessional life and had amassed enough wealth to become a target of the Varhk tax: It soon became apparent that the really important data de- termining a taxpayer’s assessment were his religion and nationality. From subsequent revelations, it is known that the taxpayers were classified in two separate lists, the M list, for Muslims, and the G list, for non-Muslims (Gayrimiislim). Later, two other categories were added, E for foreigners (Ecnebi) and D for Dénme, members of the Sabbatayan sect of Jewish converts to Islam. Dénmes paid about twice as much as Muslims, non-Muslims up to ten times as much. Foreigners, on instructions from Ankara, were to be assessed at the same rate as Muslims, but poor registration and in- efficient administration led to the taxing of many foreigners as if they had been non-Muslim Turkish citizens, thus pro- voking the intervention of the foreign embassies and con- sulates on behalf of their nationals. (Bernard Lewis, The Emergence of Modern Turkey (Oxford: 1968) p.298) Throughout the winter of 1942-43 arrests of non-Muslims and seizures of their property continued. At the same time, non-Muslim businessmen with tax debts were deported to the labour camp of Askale in an inaccessible spot in the mountain area west of Erzurum. Askale in the minds of the city dwellers was thought of as the Turkish Siberia.'' Altogether, 1400 non-Muslim or dénme Turkish citizens were interned in such camps. Nor were the aged, the sick and infirm spared. Amongst those defaulting taxpayers despatched to Askale there was a 70 year old partly-paralysed Jew, Sheban while another, Behar, aged 65, was handicapped.’? Another Jewish businessman xiFOREWORD named Romano died on 28 March 1943, after a short illness suffered lying on some straw in a stable at Askale. Overall, the human casualties of this sad affair numbered twenty one persons. Reflecting on the hardships caused by the Varlk episode, Sir Knatchbull-Hugessen, the British ambassador in Ankara, asserted that ‘the treatment and hand- ling of the deportees have been characterized by roughness and inconsiderateness’ and went on to conclude that the conditions in these camps were ‘unworthy of a modern civilized country’."3 The flagrant differences shown in the assessments invites the charge that the Varlkk tax had a dual purpose. Apart from purely fiscal considerations the tax sought to transfer to Turkish control many of the minority commercial establishments in Istanbul which had survived the policy of economic nationalism during the 1920s. As Nadir Nadi, the owner of the influential Cumhuriyet, pointed out: according to a more specific explanation which was whispered from ear to ear, or even at times voiced out loud, a second objective of the tax was to free the market from the control of the minorities and open it to the Turks . . . Thus, our Jewish, Greek Orthodox, Catholic and Gregorian sub- jects who were proud of being Turkish citizens had to sell out their property and wealth for nothing.!* For the Jewish and Christian Turkish citizens the tax became nothing less than a small-scale bloodless financial massacre. Commenting on the bill many observers of Turkish affairs were contented that the influence of Nazi ideology in Turkey had stimulated considerably the build-up of a general anti- Semitic and anti-minority feeling in 1941-43, which culminated with the imposition of the infamous tax on wealth.'5 In addition, a recent study has clearly shown that at the early stages of World War II, an influential section of the Turkish leadership flirted closely with Nazi Germany.‘ The influence of racist ideology in Ankara may be illustrated by the in- vestigations of past family records by Turkish officials in order to determine which Turks were of Jewish origin. Encouraged by the government’s attitude, a bitter campaign against the dénmes and the Jews was inaugurated in the large urban centres. In particular the dénmes were denounced as ‘being even worse than the Jews, because they pretended to be Turks xiiFOREWORD and wanted to have the best of both worlds’. The American educated journalist Ahmet Emin Yalman, a Turk of Jewish origin, had his newspaper Vatan suspended and was himself deported to Agkale. Again the astronomical assessments im- posed on Jews from the Axis countries indicated Turkish desire to curry favour with Nazi Germany by following anti-Semitic policies.!’ In turn the Nazis wholeheartedly approved of the Varlik episode and its ruthless application on the minorities'*. The New York Times correspondent in Turkey, C. L. Sulzberger, who in three long and detailed articles, drew world- wide attention to the punitive tax on wealth, stressed: America and Britain cannot dictate tax laws to Turkey any more than they can to each other. But they can certainly view with some uneasiness the devlopment in Turkey of a narrow nationalism reminiscent, even in a milder way, of that which Germany has imposed on Europe. We hope that as Turkey turns more and more away from the Nazis in other respects she will turn from them in this respect too.'® Indeed, the end of the Varlik taxation coincided with the realization that Germany had lost the war. In December 1943, a week before President Inénii was scheduled to meet Churchill and Roosevelt in Cairo, the Jewish, Greek and Armenian de- portees were allowed to leave Askale and return to their homes.”° The tax was cancelled a few months later on 15 March 1944 in an effort to placate the sensibilities of Western demo- cracies and to win the favour of the Russians. At the same time, President Inénii removed from the government those in- fluential elements with Panturanian leanings, who in 1939-1943 had readily bargained Turkey’s entrance to war with territorial gains on Iraq, Syria, Cyprus, Dodecanese, Eastern Aegean Greek Islands, Bulgarian Thrace and even Crimea and Caucasus.?! Faik Okte’s contribution to understanding the Turkish wartime society is vital. With complete frankness and thoroughness the defterdar (director of finance) in Istanbul presented evidence attributing the conception of the dis- criminatory bill to the Turkish Prime Minister Stikrii Saragoglu, who had assumed office only in July 1942 and who was con- sidered to be a close associate of President Ismet Indnii. As Faik Okte points out in his book, the Varlik Vergisi violated the xiiiFOREWORD minority clauses of the Lausanne Treaty and revealed once again that the true Ottoman concept of what made a first-class citizen was still vigorously alive behind the secular facade of the Turkish Republic. Immediately after World War II, when the new State of Israel came into existence, approximately one- quarter of the Jews of Turkish citizenship emigrated to Israel within one year. The Istanbul Greek minority which amounted to 112,000 in 1923 left Turkey en masse during the 1950s and 1960s, while the number of Armenians has dwindled dramatically. NOTES 1. L. V. Thomas and R. N. Frye, The United States and Turkey and Iran, Cambridge, Mass. 1951, pp 96-98. 2. The Times (London), 4, 5, 7 and 16 July 1934. 3. Thus, Zaman of 9 July 1934 urged the Jews to refrain from com- plaining and concentrate on adopting the Turkish culture. For the efforts of the Chief Rabbi to find food and shelter for the deported Jewish refugees in Istanbul see The Times (London) 5 July 1934 4. Ibid, 31 March 1937. 5. Annual Report on Turkey (1938). Report prepared by the British Ambassador in Turkey Foreign Office 371/23301/E1214. 6. Ankara Chancery to Southern Dept. 4 June 1941, FO/371/30031/ RS5813 for details 7. Though a non-belligerent throughout World War II, Turkey mobilized about one million men. 8. Eg. the semi-official Ulus of 24 November 1942 accused the “Yorgis, Salamons, Kyriakos, Artins’ in other words the members of the Greek, Jewish and Armenian communities for bringing about the economic ills that had fallen on Turkey. 9. For details see B. Lewis, The Emergence of Modern Turkey, London, 1968, pp 298-99. See also report of the U.S. ambassador in Turkey, Steinhardt (of Jewish faith) to the Secretary of State, Ankara, 18 January 1943, Foreign Relations, 1943, iv, p.1079-81. 10. Lewis, op. cit., p.298. Ll. Ahmet Emin Yalman, Turkey in my Time, Norman, Oklahoma, 1956, pp204-205. 12. ‘Memorandum on conditions in the assembly camp of Demirkapr’, Colonel Binns to the British Consul-General in Istanbul, FO/371/37402/R2416/24.1.1943. Colonel Binns was a British liaison officer stationed in Istanbul 13. Hugessen to Eden, Ankara, 23 December 1942, FO/371/33389/ 8885 14, Nadir Nadi, Perde Arkalarindan (Opening in the Curtain), Istanbul, 1964, p.178-9. xivFOREWORD . Ahmet Emin Yalman, Yakin Tarihte Gérditiklerim ve Gegirdiklerim (What I have seen and experienced during the recent history) Istanbul, p.375. . Frank G. Weber, The Evasive Neutral, Columbia, Missouri, 1979, p.2077 . Lewis, op.cit, pp.298-9. . Lewis op.cit, p.300. . New York Times, 9 to 12 September 1943. . Lewis, op.cit. p.300. | Weber, op.cit, p.2077. For the impact of Pan-Turanian and Pan-Turkish ideals of a Greater Turkish State see the excellent study of Jacob M. Landan, Pan-Turkism in Turkey. A Study in Irredentism, London 1981. . Eleanor Bis-bee, The New Turks: Pioneers of the Turkish Republic, 1920-1950, Philadelphia, 1951, p.56. xvPreface Memory is everything to mankind. Loss of memory is insanity. Yet people often force themselves to forget events and regard failure to remember them as an achievement and a joy. Forgetting injuries that were inflicted upon us is sometimes a sign of maturity and wisdom. This should not be applied, how- ever, when we consider instances in which we have caused harm to others. It is undeniable that, as time goes by, our ability to recall a particular event fades, leaving behind a dim and unclear picture. This state of affairs helps us, to a certain extent, to forget our pains and sufferings. It is wrong to apply the same criteria on issues that concern the masses. There are epics, heroic deeds, disasters and sufferings in every nation’s history that cannot be erased from the collective memory. These events belong to history; in this way new generations have the chance to learn from the good and evil deeds of their forefathers, to draw lessons and to avoid making the same mistakes themselves. The Capital Tax (Varlik Vergisi) constitutes one of the most embarrassing events in the financial history of the Turkish Republic. Most of my friends who worked with me on the execution of the tax hated it and wanted to forget the whole unpleasant episode. I am not of the same mind. Politicians, government Officials and taxpayers played mutual roles in this sad affair which was marked by miscalculations and sufferings. It is the duty of all those involved to state all the facts clearly and to reveal the truth about this tragedy in order to prevent the repetition of such an unfortunate event. It is precisely for this reason that I have written this book. A close examination of it should reveal that the Capital Tax was the brain-child of a politician and that the technical services had nothing to do with its design. The structure of the Turkish state favours the rise of such politicians, or rather it affords them the opportunity to produce peculiarities of this kind. It is in order to challenge this state of affairs that, rather than covering up, one xviiPREFACE should come out into the open and describe the Varlk affair. To a certain degree it is a national problem, since this kind of trouble can occur at any time. Also, the form that the tax assumed reflected the way of thinking of the period. It is an obligation and a duty of our generation to record these events for future historians. Seven long years have passed since the imposition of the shameful Capital Tax. Overwhelmed by pain and tears, the pro- tagonists of this notorious incident are now aged and demoralised; some of them are even dead. With this book I shall try to rekindle and keep alive some of the events that have begun to fade. It is, of course, doubtful whether I shall succeed in my task. The subject that I propose to deal with is full of contradictions, a mixture of science and tragedy. I stand as great a chance of succeeding as an author who strives to bring together in one book a text based on scientific positivism and a tragedy like those of Shakespeare. I undertook to write this book because I am the only person qualified to do so. From the very beginning I found myself directly involved in the Varlk episode. In fact, as will be seen in the following chapters, the institution of the Capital Levy was the idea of the then Prime Minister, who in turn dragged behind him the Grand National Assembly and the Ministry of Finance. A mixed Commission of the National Assembly introduced the law in a single session during which Prime Minister Sikri Saracoglu de- fended it, while the Finance Minister, Fuat Agra, remained silent. In Istanbul, members of the Tax Assessment Board, such as Governor Liitfii Kirdar, Suat Hayri Urgiiplii, the Republican People’s Party representative, and various accountancy experts in the Ministry of Finance refrained from an active role during the execution of the levy. Similarly, the head of the Board of Inquiry, Sevket Adalan, managed gradually to assume a low profile, leaving responsibility for the implementation of the tax to local revenue board officials. Inspectors working on matters of duplication, error of fact and taxation of foreign nationals had only a partial involvement in its implementation. Even those at the headquarters of the Ministry of Finance and the members of the Parliamentary Appeals Commission had only a limited perspective on the whole incident. I played a leading role both in the assessment and in the execution of the Capital Levy. I was in close touch with the central office of the Ministry of Finance when the tax was xviiiPREFACE drafted. I represented the Ministry of Finance in the First Commission, where the revenues of the big taxpayers were assessed. It was also my task to supervise the work of the Second and Third Commissions. I personally followed the case of every single taxpayer assessed at over TL 50,000 and they deposited their tax revenues through me. Local board in- spectors were responsible for the collection of taxes below TL 50,000, and these inspectors were attached to a senior officer at the headquarters of the Finance Ministry who in turn worked closely with me. Appeals by taxpayers were forwarded to me and with my signature they were forwarded to the competent authorities. In this way I was in a position to supervise the entire correspondence and procedure. The Committee for the mod- ification of the taxes imposed on foreign nationals relied upon the reports of local inspectors; I was in charge of the signing of the postponement orders that were based on decisions taken after inquiries. Together with the Governor of Istanbul, I was responsible for deporting defaulters to the labour camps. After signing the lists of deportees, I would send them to the Governor for approval Finally, as the head of the Finance Office in the district I was in a position to wield unlimited control over the rest of the civil servants. I could remove immediately any employee I dis- approved of or distrusted. It is quite evident that I had to co- ordinate the whole affair. In this respect, rightly or wrongly, I assume, in advance, part of the responsibility for the enforce- ment of the Capital Levy. I would like to stress that in writing this book I was not trying to prove a thesis. I did not enter the arena of politics. I did not strive to defend a particular cause. I only took great pains to remain faithful to the truth. Otherwise, there would have been no reason or need to write it. There is a section of short-sighted so-called politicians who, unaware of the course of events and the ominous developments of political history, waste their time indulging in coffee-house tittle-tattle. They would no doubt condemn my book even before they took the trouble to read and form an opinion of it. These unfortunates, who regard every opinion that does not accord with their own way of thinking as blasphemy, may even turn to demagogy and present me as a person who is disclosing state secrets. The reason for their involvement in politics is to xixPREFACE advance their own interests. They consider any ideas in conflict with their own as dangerous and thus against the interests of the country at large. But as a matter of fact this sort of farce has lost all its appeal. We simply gave ourselves away the day we enforced a law which treated differently a Muslim and a non- Muslim citizen, both of whom worked side by side, paid the same rent and possessed the same financial abilities. Anxious to defend the rights of their nationals, foreign embassies addressed hundreds of diplomatic communiqués to the Turkish Foreign Ministry giving comparative examples of the different taxes imposed on Turks and foreign nationals. There can be no privacy or secrecy about the imposition of taxation. The whole affair occurred before the very eyes of the citizens. In this book, I try to show who masterminded and administered the tax and how our actions resulted in such a humiliating episode. As far as I am concerned, this aspect of the Varhk affair should be taken as a lesson and a grave reminder.1 An Overview of the Prevailing Conditions Before examining the Varlik Vergisi (Capital Tax) episode, we should search for the reasons that prompted the introduction of such a fiscal measure. To do this, it is imperative to be acquainted with the financial, economic and political situation then prevailing in Turkey. Every event has to be studied within the framework of the time and place in which it occurs. I am confident that my readers, after going over the subject, will come to the conclusion that Turkey needed an extraordinary tax on capital. It did not, however, need a tax that took the form of the Capital Tax phenomenon. Therein lay the blunder. The Republican People’s Party (RPP) Government inherited from the Ottoman Empire a bankrupt and neglected country On the eve of the establishment of the Turkish Republic, Anatolia resembled a disintegrating body infected with malaria and syphilis. There was no industrialisation. The mines lay idle. Agriculture still employed medieval methods. Livestock breeding had deteriorated. Crop cultivation needed updating. Forests were about to be exhausted. Commerce was controlled by the non-Muslim minorities and was based on the principle of exporting raw materials in return for imports of industrial and consumer goods. During the First World War the country was impoverished. The chronic deficit in the balance of payments was covered by gold reserves. During the war of independence, the Kemalist leadership failed to accord the required im- portance to economic matters. Those who had achieved victory by risking their lives now believed that they could overcome all sorts of hardship. They were not aware that every single day they would have to face gigantic obstacles. Moreover, the Kemalists, by background 1AN OVERVIEW and profession, did not belong to the economic and managerial classes that were capable of bringing about the development of the country. A major failure was their inability to organise the state in accordance with its economic needs and to consult competent people in this respect. Hindsight has shown that progress cannot be achieved by nationalist victory hymns. But it took some 25 years for our leaders to grasp this simple truth. Another major mistake committed by the republican leadership was its hostility towards foreign capital. This was perhaps a reaction to the sad experience of the Ottoman capitulations system. But, unable to free itself from the past, the new leadership shied away from employing foreign capital under favourable conditions for the reconstruction of poverty- stricken Turkey. Going a step further, the RPP Government attempted to buy out the foreign-owned economic enterprises, such as the railways and the dockyards, thus heedlessly over- burdening the budget. Under these circumstances no economic development could take place. Another factor impeding economic progress was the shortening of the time for the settlement of debts with fixed long-term clearance periods. It was only in 1946 that an accommodation with foreign capital was accomplished; this arrangement carried the signature of the late Halit Nazmi. Another miscalculation was the adoption of etatist economic policies by the republican regime. It was once a commonly held view that in order to achieve industrial and economic progress underdeveloped countries would have to resort to massive state intervention. Turkish administrators were very impressed by the fashionable ideological models prevalent in that period. In fact, during the Second World War Turkey benefited considerably from the existence of a state-controlled industrial sector. In the final analysis; only with the initiative of the state could an indus- trial structure of such dimensions have been accomplished. Nevertheless, events have clearly demonstrated that the in- frastructure of Turkey was not in a position to afford etatism. Contrary to the assumptions held by the German-educated Kemalist administrators, production costs are much higher in state-run manufacturing industries; abuse is widespread; gov- ernment-appointed directors do not pursue business as seriously as members of the entrepreneurial class. In short, Turkish in- dustry did not have the strength and capacity to stand on its own feet without massive financial intervention by the state 2AN OVERVIEW The financing of state-owned industrialisation with short- and long-term credit loans extended by the Treasury caused severe strains on the currency, which was obliged to increase several times, leading to price rises and a mounting cost of living. Today, it is generally assumed that state-sponsored industrialisation can not be accomplished in this fashion Similarly, it was erroneous to select sites for the newly con- structed state industries by virtue of their strategic and military locations. A sad illustration of this was the ill-conceived con- struction of the iron and steel works at Karabiik at a strategic location but far from available vital iron and coal reserves. It is a grave mistake to establish industries before determining their suitability to a country’s structure. Paper and chemical manu- facturing should also be included in this category Lack of effective planning was yet another serious failing of the new governing class. While neighbouring states con- centrated on specific 3-S-year plans, Turkey haphazardly undertook to put into practice visionary and Utopian concepts without any prior research and without consulting competent people. On ount of such half-measures and incoherent policies, Turkish economic development remained stagnant In this respect, another point that should be stressed was the inability of the ruling class to establish economic priorities. Thus while, on the one hand, Turkey had in some ways still not escaped from medieval backwardness (in Garzan people still lived in caves), on the other hand, the state sponsored the construction of prestigious industrial complexes that impressed foreigners. At the same time, it cannot be denied that during the RPP period Turkey experienced noteworthy economic development. Notwithstanding the grave lack of planning, a considerable amount of progress had been accomplished by 1939. No doubt, without the severe economic strains engendered by heavy military expenditure during the Second World War, the country would have experienced better days. Hundreds of thousands of Turks were forced into military service, causing serious de- mographic, economic and financial difficulties. The Capital Tax was one of the principal disasters caused by the Second World War. A cautious political leader would have managed to save Turkey from the Varlk tragedy, but the country did not produce such a political figure.AN OVERVIEW FINANCIAL SITUATION Expenditure From the financial year 1938 onwards, both revenue and ex- penditure figures showed a constant upward tendency. Revenues (TL'000) Expenditure (TL‘000) 1934 250,049 249,954 1944 901,511 952,434 While in 1939 national defence expenditure amounted to 163,941,989 Turkish Liras, in 1943 this figure had increased to TL542,516,800. In an effort to meet this mounting defence spending, dictated by the war and the strained world condi- tions, the Turkish Government had no alternative but to intro- duce an extraordinary tax on wealth Taxation In studying the Capital Levy, one should also examine the contemporary taxation system. In 1942 when the Capital Levy was introduced, budget revenues stood at TL394,328,000. The most important taxes were as follows: TL’000 Profits Tax 51,190 Livestock Tax 28,100 Customs Tax 21,340 Transactions Tax 51,950 Domestic Consumption Tax 60,407 Stamp Tax 12,000 Monopolies Tax 60,405 Crisis Tax 22,000 Balance Tax 21,800 National Defence Tax on exports 9,000 The Capital Levy was based on Profit Law No.2395 which was already in force, and its appendices. After 1943,with Laws No.2574, 2729, 2751, 2957, 3258, 3470 and 3840, this Profit Law was modified and tax rates were raised. Other increases in profits tax took effect with Laws No.3828, 4040, 4437 and 4565 4AN OVERVIEW In 1936 Turkish national income stood at TL514.5 million. The profits submitted for that year and then paid as profits tax for 1937 totalled TL12.4 million. The ratio of income tax revenues to national income was 2.4 per cent. In 1943 when the Capital Tax came into force national income stood at around TL2,430 million and the equivalent direct taxation was 120 million, a ratio of levy to national income of 4.7 per cent. These comparisons demonstrate that the existing taxation system had proved inadequate in taxing gross earnings, which led to gross inequalities, while the steep rise in prices crushed small companies and salary earners who paid the exact amount due to the government. The distribution of Profits Tax in 1944 according to taxable categories is shown in Table 1.1. Table 1.1 Distribution of profits tax 1944 No. of Tax paid taxpayers % (TLM) ratio Businessmen/tradesmen holders of tax books 451,901 4.7 314 13.87 Contractors/middlemen 45,057 4.0 84 3.70 Private employees taxpaying by declaration 8,705 08 626 27.65 Salary earners 580,000 53.5 124.0 54.78 Total 1,083,663 100 226.4 100 Thus, as Table 1.1 shows, out of a total of TL226.4 million the salaried classes paid TL186.6 million. On the other hand, while constituting over 41 per cent of the total number of taxpayers, the entrepreneurial and artisan classes paid only 13.8 per cent of the total amount. Without a proportional contribution from the prosperous classes to the state ex- penditure, the economic and fiscal structure of the country was weakened and the way was paved for the imposition of the Land Products Tax and the Capital Levy. In comparison, profits tax represented over 75 per cent of the taxes collected in most of the major countries during the Second World War. In some countries income above a certain amount was seized by the state in the form of a compulsory loan. Because of the inequitable distribution of wealth fostered by the existing Turkish tax policy, tax evasion and corruption were rampant. Thus, during the war the tax assessments of salary earners were calculated on a sliding scale worked out at between 21.75 and 30.30 per cent for those employed in the 5AN OVERVIEW public sector and 27.24 and 30.81 per cent for those in the private sector. The salaried classes, who consisted not only of bureaucrats, assumed the bulk of the burden of direct taxation. This is clearly illustrated by Table 1.2. Table 1.2 Taxes collected from salary earners and other groups (TLm) Years Salary earners Other groups 1938 50.2 1940 68.3 27.3 1943 107.1 89.5 The main reason for this unjust taxation of salary earners was the ease with which bureaucrats could assess their taxes. In this easy, if not immoral, way the Ministry of Finance was able to collect its taxes. Various other taxes and duties Between 1941 and 1944 revenue from customs duties fell from TL24 to 20 million. The decrease was brought about by the depressed market conditions and the fall in the volume of imported commodities. Directly linked to the principle of value, both Import Procedures Tax and Manufacturing Tax increased from TL11 to 21 million and from TL30 to 98 million respectively. The Monopolies Tax rose from TL66.2 million to TL186.8 million. There was a similar growth in purchase taxes. But indirect taxation has the major flaw of taxing both rich and poor indiscriminately. In contrast income tax should con- stitute the backbone of the entire fiscal system. In Turkey, income tax was kept at a low level and was, in fact, rendered unproductive, thus placing the main burden on sales taxes which, in turn, crushed the poor and the lower middle class. But even the raising of the purchase taxes did not remedy the country’s financial situation. Meanwhile, during the period which coincided with the imposition of the Capital Tax, the government both ordained various temporary levies and duties and increased already existing ones. An analysis of such fiscal measures is given in Table 1.3AN OVERVIEW Table 1.3 Other taxes and duties (TL’000) Name of Tax 1940 1947 «194219431944 Crisis Servicing Tax 16,236 18,028 23,033 34,802 38,802 Balance Tax 20,236 22,262 27,984 39,285 42,681 Wheat Protection Tax 49,578 49,136 Export Protection Tax 4,015 21,296 33,993 Entry Protection Tax 80,130 Postal Protection Tax 6,526 Construction ProtectionTax 2,227 2,868 3,104 3,379 Customs Tax 16,630 Airplane Tax 2,102 2,564 3,262 4,676 5,893 Reinforcement of Airforce Tax 13,743 15,064 17,998 24,303 26,237 Land Products Tax 229,130 Far from improving the financial situation, the sporadic and inconsistent character of these fiscal measures led to the des- tabilisation of the whole system of taxation. And the government was not able, even with these new revenues, to meet the mounting defence expenditure. Under these circumstances and because of pure fiscal misplanning, it resorted to the enforce- ment of two disastrous levies, the Land Products Tax and the Capital Tax. Public debt The government’s inability to finance budget expenditure led to grave public debt. Thus, whereas in 1939 the Turkish public debt stood at TL447 million, by 1943 it had reached TL1,217 million. Of this total TL228.6 million were consolidated domestic loans, TL240.8 million as consolidated foreign loans and, TL725, million as fluctuating foreign and TL22.8 million as fluctuating domestic loans. Suffice it to say, that in 1939 fluctuating foreign loans stood at TL183 million and four years later they had increased to TL725 million ECONOMIC SITUATION In order to consider the Capital Tax, it is necessary to have a good grasp of Turkey’s economic situation. Financial issues can only be studied within the framework and in relation to social and economic matters. Unlike logic and philosophy, finance is not a metaphysical science; it is closely related to reality, to 7AN OVERVIEW society and above all to economic trends. Finance is a branch of economics and economics is a branch of sociology. Expenditure According to official data provided by the General Statistical Office, Turkey’s balance of trade for the period 1938-43 ex- hibited the trends shown in Table 1.4. Table 1.4 Balance of trade 1938-43 (TL'000) Year Imports . Exports Difference 1938 149,836 114,947 4,890 1939 118,249 127,388 9,140 1940 68,922 111,446 42,523 1941 74,815 123,080 48,265, 1942 147,713 165,034 17,321 1943 203,046 257,151 54,105 A favourable balance of trade was maintained with a surplus amounting to TL65.5 million in 1944, TL92.7 million in 1945, TL208 million in 1946 and TL 539 million in 1947. From then on, however, this favourable balance was not maintained, nor was the net surplus of TLS39 million. There is no need nowadays to stress that the balance of payments is not solely determined by imports and exports. At that time, however, other factors were unknown and consequently were not taken into consideration. Regardless of the real amount, because of this surplus a certain quantity of gold reserves was accumulated in the hands of the government and the Central Bank. According to the bulletin of the Ceritral Bank the gold reserves stood at the amounts shown in Table 1.5. Table 1.5 Official gold reserves 1938-44 (TL’000) Year Internal External 1938 24,136 12,736 1939 21,802 14,083, 1940 102,122 6,733 1941 102,125 9,339 1942 104,954 38,116 1943 109,240 92,454 1944 104,954 38,115AN OVERVIEW According to data produced in the bulletin, of the existing gold reserves 55 tons were in the hands of the government and the rest was stored at the Central Bank. Notwithstanding the favourable balance of payments, the volume of trade decreased visibly during the war, as shown in Table 1.6. Table 1.6 Volume of trade (mt) and value (TL’000) 1936-44 Year TL'000 Tons (m) 1936 210,265 1.909 1937 252,363 1.975 1938 294,783 2.291 1939 245,638 1.869 1940 180,369 1.015 1941 197,896 0.739 1942 312,748 0.699 1943 397,475 0.677 1944 460,198 0.724 The value of foreign trade stood at TL245 million in 1939, de- creased to TL 197 million in 1941 and then started mounting again. The volume of imports and exports continued to decline, but the value, owing to an increase in the prices of consumer goods, remained high. Official data show that the volume of imports and exports stood at 2.291 million tons in 1938 declining to 699,000 m.t. in 1943. A major consequence of this fall in volume was a shortage of imported commodities. Wholesale and retail prices The wholesale price index for consumer goods was as shown in Table 1.7. Table 1.7. Wholesale price of consumer goods 1940-44 (1938=100) Years Average Prices Average prices Average prices General index of agricultural ofmeatand of industrial raw products dairy products materials and industrial goods 1940 123.3 121.8 134.5 126.6 1941 179.8 1748 176.3 175.3 1942 424.9 386.6 261.2 339.6 1943 894.5 752.8 319.0 590.1 1944 539.4 520.9 355.6 458.0AN OVERVIEW Table 1.7 shows that even after the institution of the Capital Tax wholesale prices continued to increase, thus frustrating all hopes entertained by the government for a curb of the inflationary war- time conditions. Currency The astronomical increase in note circulation as shown in Table 1.8 was also closely linked to the introduction of the Capital Tax. The unhealthy increase in the Treasury’s paper money in circulation during the Second World War was mainly occasioned by the heavy military expenduture and the war-time defence policy. The ex- tensive note circulation is shown in Table 1.8. Table 1.8. Currency in circulation 1937-44 (TL’000) Year Paper Money Coins Total 1937 168,630 25,538 193,988 1938 193,970 25,452 219,431 1939 281,460 26,589 308,649 1940 403,556 30,344 433,800 1941 512,473 31,029 543,502 1942 733,944 31,601 765,545 1943 802,110 31,544 833,664 1944 960,834 33,707 944,541 The depreciation in the value of paper money caused an upsurge in the price of real estate and gold. Between 1916 and 1944 gold prices in Turkey increased approximately 37 times. Until 1915, the Ottoman Empire maintained gold as the official currency, and the Ottoman Treasury possessed enough gold reserves to manage the Empire’s foreign trade relations. The unfavourable balance of payments registered during the post-1915 period prompted a de- pletion in the Treasury's gold reserves. The steady rise of gold prices in conjunction with a depreciation in the value of paper money led to higher prices and inflationary conditions. THE PATH LEADING TO THE CAPITAL TAX At this stage an overview of the dominant political currents in Turkey would be useful Etatism, the politico-economic system that was prevalent in Turkey in the period before the Second World War entangled the 10AN OVERVIEW country in various quota, barter and other concepts of Teutonic origin. Etatism has occupied an important place in the re- publican Constitution. The effects of the etatist measures led to an expansion of the public sector and a rise in the numbers of civil servants. With the system of annual salary adjustments for public employees, the state found itself unable to cope with the mounting wage expenditure. A major failure of the war-time goveraments was their inability to find an effective solution to the problem of public service wages which absorbed more than 50 percent’ of government expenditure. The funds needed for the construction and operation of state industries were provided by short-term measures, such as in- creasing fiduciary circulation. Even today, state-owned estab- lishments like the Swmer Bank, Eti Bank and affiliated en- terprises, Turkish Maritime Lines, the postal services and the Land Products Office cover their deficits by means of gov- ernment bonds issued by the General Directorate of the Tre- asury. The law regulating the operation of the Central Bank pro- vided for the adjustment of inflationary trends. With certain modifications of this law, the Central Bank, with the consent of the Treasury, was authorised to tender commercial title deeds for the payment of various bonds issued by government de- partments, agencies and state-owned banks. The exact amounts of bonds are to be found in the bulletin of the Central Bank. Inevitably, paper money poured into circulation as a means of covering commerical needs and demands. During the Second World War there was, as noted earlier, a severe shortage of imported commodities. Turkey was obliged to keep a million men on war footing, thus withdrawing them from the available labour force and from productive activities. The needs of the mobilised troops were an additional burden on state expenditure and placed severe strains on the budget. The steep rise in the cost of living was reinforced by an imbalance between supply and demand, severe shortages of basic com- modities and the psychological effects of the war. Hoarding and speculation were rampant. Unable to realise the gravity of the situation, the government reacted in a piecemeal manner. More than anything else, the indifference and ineffectiveness of the war-time governments are unforgivable. A check on the circulation of large amounts of paper money should have been the first remedial step. By adopting deflationary measures the iAN OVERVIEW government would have managed to balance supply and de- mand. Even in Britain, the birthplace of free trade and liberal capitalism, large-scale deflationary measures were instituted during and immediately after the war. In Turkey, however, no preventive measures as regards imported goods were taken. As a result, great fortunes were being made by those in a position to exploit the desperate shortage of basic commodities. The government reaction to these developments was con- fined to the introduction of controls on bread, coal and rents. Controls imposed on bread consisted of two legislative acts: the Protection of Cereals Tax and the bill relating to the Land Products Office. In an attempt to prevent shortages, this Office was charged with the purchase of grain produce and its smooth distribution among the population. But after the pro- mulgation of the National Defence Law (18 January 1940) growers were required to surrender a large fraction of their grain crop to the Land Products Office at low fixed official prices. Not only were the peasants unable to sell their grain crop in the free market but they were obliged to pay a heavy Land Products Tax, estimated at TL229 million for the period 1944-7. Notwithstanding these cereals controls, hoarding re- mained widespread and it was always possible in the big urban centres to find a white bread loaf at black market prices. As coal was already under state ownership — the controls introduced in this sector were less controversial. In an effort to keep prices below production costs, the government covered the losses by injecting profits made in the textile sector into the coal industry. This meant that the advantages enjoyed by the urban consumer (coal, electricity) were subsidised by the peasants who provided the raw materials for the state owned textile industry. By and large, rent controls proved successful, though the measures did cause a certain amount of shortage in rented accommodation. On 7 October 1940, the government, within the framework of its efforts to impose price controls and to combat profiteering, published Circular No. 24 classifying imported commodities and pricing them according to their category. At regular inter- vals throughout the war years, Ankara readjusted the market prices of foreign goods. These readjustments encouraged hoarding and speculation. Similarly on such items as works of art, no definite price could be set. Although Turkish products were in high demand and were sold at strategic rather than 12AN OVERVIEW commercial prices, exporters were able to conceal their earnings by avoiding making out invoices. Thanks to the absence of any effective method of control, market conditions remained highly unstable. A hastily ap- pointed supervisory committee, manned mainly by high-school graduates who lacked sufficient knowledge of financial affairs, management, banking, accountancy and jurisprudence, was in no position to control the ailing economic situation. Dispro- portionately large fortunes were amassed, on the one hand, by those in a‘position to stockpile basic imported goods and divert them to the black market and, on the other, by those in a position to export Turkish products to the warring nations Owing to the tax system in Turkey, during the war these people managed to pay comparatively little by concealing their real earnings. Under these circumstances efforts for a more equitable dis- tribution of the basic imported commodities throughout the country were doomed to failure. There were problems with planning a distribution programme, i.e. local peculiarities and needs were not taken into account. Inevitably, through black-market activity, most of the much sought-after foreign consumer goods found their way to the big urban centres. A typical example was the distribution of imported motor cars, trucks and rubber tyres. Although the assemblage of all motor vehicles at government offices mitigated abuse to a certain extent, it concurrently stimulated demand for such commod- ities. Instances of favouritism and injustice were frequent. Nor could the traditional business establishments, that pre- ferred to abide by the regulations and adopted the government- imposed prices, compete with the black marketeers. Hundreds of war-rich merchants started buying out the old-established commercial firms of Istanbul. The government preferred to remain aloof from this tragic development. With dispro- portionately large amounts of capital accumulated in their hands, the war-rich were in a position to spend their money openly and thus increase the inflationary pressures on the Turkish currency. Inflation, however, hit hard those with fixed incomes; pensioners, wage and salary earners, who also paid the exact amount of taxation due to the government. Concurrently, the ever rising prices, the depreciation of the currency, the mounting defence expenditure, the enormous budget deficit and the spread of hoarding generated real dissat- 13AN OVERVIEW isfaction both in the government and among the masses. This resentment was directed against the business class in general and the war-rich in particular. A further complication was posed by the fact that the non-Muslim minorities were still well represented in the commercial classes. While the Muslim Turks reserved for themselves the army, the bureaucracy and other related professions, the minorities continued to be merchants, bankers, commission agents and importers and exporters. The visible presence of non-Muslims in the enterpreneurial classes was resented by the Turks and this constituted a major factor prompting the imposition of the disastrous Capital Tax. Throughout history the hungry have threatened the well-fed with their fists. This is what happened in Nazi Germany and Bolshevik Russia. Many common points exist between this basic law of nature and the Varltk tax. The infamous tax was also the result of racist concepts which were still influential in war-torn Europe. By the time the Capital Tax was instituted, however, far-sighted observers had already pointed out that the Axis cause was doomed to failure. Despite these early warnings, Turkish official reaction came late. It is quite obvious that, at this particular juncture, Turkey needed an extraordinary tax on capital. What it did not need was this misbegotten offspring of German racialism and Ottoman fanaticism. 142 The Capital Tax SEARCH FOR NEW TAXES ON THE EVE OF THE CAPITAL TAX As we have seen, Turkey’s shaky economic situation was further debilitated by the strain of maintaining a fully mobilised army. To meet military expenditure, the government had re- course to printing an increasing amount of paper money. With a diminishing volume of basic imported commodities and an in- creasing volume of paper currency in circulation, inflationary pressures on the economy became unmanageable. Under these circumstances the situation could have been remedied by with- drawing excessive currency from the inflationary market. De- flationary measures that could have been resorted to were either the enforcement of a compulsory loan or the adoption of an emergency fiscal measure. At first, the Finance Office con- sidered the introduction of a tax bill. This view was elaborated in Report No. 113/22144/6 October 1941 addressed by the Gen- eral Directorate of the Treasury to the Finance Ministry. The document stressed that the Profits Tax already in force was outmoded and was burdening the weak members of society disproportionately while leaving loopholes open for tax evasion by the rich. The inequitable methods of taxation, the report went on to underline, were further reinforced by fiscal laws No.3821 and 4040 which increased the taxes of salary and wage earners. Unlike most countries that had managed to cover their war expenditure to a large extent by existing taxes, Turkey, the report explained, had completely failed to do so. Attributing this failure to the ineffectiveness of the tax system, it proposed its fundamental restructuring. Appropriate steps in this respect should be taken by a committee of experts, 15THE CAPITAL TAX charged with this purpose. I was appointed head of such a committee, which comprised Mehmet Izmen, Director of Finance in charge of revenue and wealth in Istanbul, and Rasim Saydar, special adviser on accountancy matters. The committee began work at the beginning of 1941 and continued until July of the same year. Six months was obviously too short a period to examine thoroughly the thorny. issue of restructuring the Turkish fiscal system. Under these conditions, our work was bound to contain many inadequacies—something we did not hesitate to point out in our reports. The committee submitted two reports to the Finance Ministry within the six-month period. In the one dated 11 July 1941, a thorough analysis of the existing Wealth Tax No. 2395 was attempted. We proposed that those taxpayers who paid taxes on declared (beyannameliler) gross earnings should be sub- jected to an exceptional rise in their wealth tax. Concurrently, we recommended that regular account books should be made obligatory for those taxpayers who paid their taxes by making a simple declaration of their gross earnings. Following these recommendations the government submitted a draft tax bill to the Grand National Assembly, but it was withdrawn when N. Siimer was appointed to the Ministry of Finance. Once again I was asked to head a new investigation committee made up of Rasim Saydar, Mehmet Izmen, Pro- fessor Naumark, and accountancy expert Ali Alaybek. Finally, on the recommendation of this committee, the Ministry of Finance was persuaded to adopt an extraordinary fiscal measure on wealth. On 12 December 1941 the committee submitted the following report to the Ministry of Finance. Taking advantage of the emergency conditions prevailing many individuals have managed to amass war-inflated profits at the expense of the general public. It is imperative that an extraordinary fiscal measure be introduced, designed to force those individuals to pay taxes commensurate with their large fortunes. This view is in line with the fiscal policy followed by most of the war-time governments throughout the world. Consequently we recomend: a) After deducting the amount of taxes paid on declared gross earnings since 1 January 1939, and having put aside 15 per cent for sinking fund needs, the remainder should be col- 16THE CAPITAL TAX lected as an extraordinary tax. The profit reserved for capital in joint stock companies should be fixed at 12.5 per cent. b) A commission should be appointed for the integration of a section of taxpayers with income into the category of those paying taxes on declared wealth. After subtracting the amount of taxes paid on their gross earnings, and after allow- ing a 15 per cent profit margin, the remainder should be collected as an extraordinary tax. Taxpayers who do not submit gross earnings declaration and who do not possess tax assessment books should be taxed on estimated assessments. c) Commission agents should be assessed in the same manner. d) Prices of real estate transactions that took place after 1 January 1939 should be determined, and after deducting the regular interest, the remainder, together with an added value, should be levied at 50 per cent. To make the emergency tax operational the report recom- mended an increase in the staff of the accountancy department of the Ministry of Finance, the setting up of an information service, the intensification of punitive measures against de- faulters and the modification of the appeals system. I am still convinced that, had the proposals made in the two reports been implemented, Turkey would have succeeded in overcoming its war-time financial crisis. But our recom- mendations were, at that stage, regarded as too drastic by the Ministry of Finance, who doubted whether such proposals would be approved by the Grand National Assembly. At first, we were disheartened by this rejection and we were only aware of the objectives of our leaders when the notorious Varlik tax was introduced by the National Assembly. RECOLLECTIONS OF THE IMMEDIATE PRE-CAPITAL TAX PERIOD Finance Minister Fuat Agrali promoted Sevket Adalan, the Finance Director of Istanbul, to the position of Head of the Inspection Commission. I was a close friend of Adalan with whom I had worked for many years. On his recommendation I was appointed the new Finance Director of Istanbul, despite my initial reluctance to accept the post. Later on, both Agrali and Adalan were to admit that at that particular juncture they were 17THE CAPITAL TAX looking for a sacrificial lamb to implement the punitive Varhk law. On 12 September 1941 I began work at my new office and from the very beginning I took a liking to my two close associates, Finance Inspector Mehmet Izmen (charged with matters concerning the Profits Tax) and Mihittin Girin (assistant Finance Director). Soon after my installation in my new post, Mehmet Izmen brought me a document from the Ministry of Finance. After referring to the great fortunes that had been amassed because of the war and the speculative practices of some merchants, the document repeated that war-profiteers were able to pay comparatively little tax by means of concealing their earnings. This, according to the document, led to the accumulation of a disproportionately large amount of capital in the hands of a few, particularly the members of the minority groups. It stressed the urgency of collecting more data on individuals who had gained enormous wealth, singling out the Greek, Armenian and Jewish citizens in a separate list. Acting on these in- structions, the Revenue Office of the Finance Directorate addressed a letter to its branches in Istanbul requesting more information on the merchants and commission agents in the city. Soon lists with names, addresses, professions and rough estimates of their war-time fortunes began to be forwarded by the local branches to the Istanbul head office. I asked Izmen how these figures were calculated. He responded with a smile: ‘Simply by guesswork’. Indeed, these figures and data were marked by their incon- sistency. But even more astonishing was the policy of dis- crimination advocated by the Ministry of Finance. It was the first time that I witnessed a difference in the treatment accorded to Muslim and non-Muslim merchants. Until then the affair was surrounded by well-guarded secrecy. 1 demanded some sort of explanation from Adalan who was preparing to leave for Ankara to assume his new office at the Ministry but he gave me an evasive answer. During the following days I had no time to occupy myself further with this problem. I had suddenly assumed the res- ponsibility for a sophisticated department employing some 1,500 public servants. I had to face many articulate citizens who were contesting various tax rates. The press gave wide publicity to such complaints regardless of whether they were justified or not. I had to pay particular attention to administrative issues 18THE CAPITAL TAX and to intragovernmental relations. Never having worked in the past in any administrative capacity, ] felt rather inexperienced. I thought that, before taking on the question of the imposition of an emergency tax with separate lists for Muslims and non- Muslims, I should deal with the pressing matters of the Direc- torate. Anyhow, I was given little authority over the tax lists. One morning Adalan called me and demanded the despatch of the tax lists to Ankara within a week. After that I was obliged to leave all pending business and concentrate on this specific issue. From that day on I focused all my efforts on the Capital Tax leaving the Directorate’s routine business to the assistant Finance Director. At Izmen’s suggestion the taxpayers were classified into two separate lists, the M list for Muslims, and the G list for non- Muslim minorities (Gayrimiislim). Later, two other categories were added, E for foreigners (ecnebi) and D for Dénme, members of the Sabbatayan sect of Jewish converts to Islam. Ankara did not approve of my idea of using the information services of the national banks during the period of the tax assessments. When I compared the figures given to me by some well-informed and trustworthy businessmen that I knew with those forwarded to the Finance Directorate by its branches, I became aware of how unrealistic these assessments were. I found myself in an impossible situation. At my request Adalan came to Istanbul and we sat and studied the conflicting figures together. He also approached some of his trustworthy friends in the business community of Istanbul. But once again the new information was inadequate and disappointing. Because of the absence of any effective modern tax assessment system, we had little chance of producing equitable tax rates. Adalan took the lists to Ankara. It was decided that when presenting them to the Finance Minister he would explain the conflicting and unrealis- tic nature of the assessments. Adalan still maintained that the figures were only of a statistical and informative nature and that he would explain to the Minister the lack of specific guidelines and the imperfect nature of the assessment lists. Together with Finance Minister Agrali, Adalan presented the assessment lists to the Premier, Siikrii Saracoglu. In early September 1942, the Finance Minister, accompanied by his assistant Adalan, arrived in Istanbul. I met them in the Minister’s private summer house at Erenkéy. With his sharp blue eyes, Fuat Agrali gave the impression of a far-sighted 19THE CAPITAL TAX statesman able to choose and promote efficient and talented subordinates. I served with many Ministers but Agrali was the one who impressed me as the most intelligent and gifted. Com- ing up through the ranks of the bureaucracy, Agrali did a great deal to modernise the Ministry of Finance. A lack of sufficient academic training was his weak point, but he was able to offset this handicap by making use of the knowledge of his close and trusted associates. In my opinion, Agrali’s unforgivable mistake was his reluctance to protest against or try to dissuade Premier Saracoglu from adopting the shameful Capital Tax. He was basically opposed to the Premier’s idea of enforcing a punitive and discriminatory tax, but he preferred to remain silent. After dinner we withdrew to the Minister’s study where, before entering into a discussion of financial matters, we chatted about my home town, Diyarbakir, and about the men of letters raised in that part of the country. Turning to fiscal issues, the Minister let me know that the government was con- sidering the institution of a once-only emergency tax bill. Reg- arding the assessment lists, I was assured that these had been asked for in order to enable Ankara to form an opinion on the matter. From the very beginning, Adalan was fully informed about the details of the Varlik Tax. The contemplated tax would mainly affect the war-profiteers and the non-Muslim minorities. Foreign residents would be taxed at the same rates as Muslim Turks. I expressed my conviction that fiscal matters should not be mixed up with political objectives. Agrali smiled and said: “You are too theoretical. I do not act in the same way as the Unionists [Committee of Union and Progress, a political party in power after the Young Turk Revolution of 1908 which ushered in a series of anti-Greek and anti-Armenian measures]. I simply wish to tax illicit profits. That’s all.” Returning from Erenkéy I felt rather dizzy. On the way home, for some unknown reason, I thought of the Unionists. Their rise to power had coincided with my youth. The Young Turk Revolution had started and expanded in European Turkey without taking such strong roots in Anatolia. I had never forgiven them for abandoning the country after the First World War. But now, as I was returning home, I started recon- sidering my views and feit that I had judged them too harshly. The Unionist leaders had fled the country without leaving a penny behind them. They were obviously honest people. Their period in power had been temporary, and their fate had been in 20THE CAPITAL TAX the hands of greedy politicians. They had undertaken plans which were over-ambitious but they always acted in good faith and in what they felt was the interest of the country. For this cause they had wasted away their lives. Then I made a compar- ison between the Unionists and the contemporary political leaders. Present-day Turkish politicians appeared so shallow, light-headed and unimportant. I could not imagine them under- taking as great a task as that of the Unionists. Nor was our era favourable for such dramatic operations. The star of Hitler had already begun to fade and the Anglo-Saxon world was about to emerge triumphant. During the following days I was engaged in selecting the staff who were to help me in the implementation of the tax. On 5 November 1942, I was summoned to Ankara. Everything was ready. The text of the Varlk Bill was prepared by the Premier’s adviser Esat Tekeli, along guidelines set out by Sikri Saracoglu. The tax bill ran counter to all previous fiscal practice. It was based entirely on guesswork. There was no provision for the right of appeal. Those who would not pay were liable to arrest and deportation to labour camps. Having read the text of the bill, I asked Esat Tekeli: —Sir, have you had a share in the responsibility for this wicked business? —No, i am simply the transcriber of the text. With the assistance of Sevket Adalan, the law was dictated by Premier Saracoglu to Agrali. My job was to formulate these notes into separate articles. Neither I nor the Revenue De- partment had any involvement in the affair. It is obviously an emergency bill... . A political act... . —What about the Minister? —He finds himself in a strange situation. He gives in- structions, though he evades giving a straight answer when we ask questions. As far as I know, Premier Saracoglu is the architect of the law. —But, Sir, you know very well that we have no income tax in Turkey. The profits tax we have is restricted to those who submit a tax statement on their gross earnings to the Finance Department. How are we to estimate the income tax? We have been friends for many years, but, honestly, do you know how much money I have? According to this law, five individuals shut themselvs in a room and assess the rates of 21THE CAPITAL TAX the taxpayers in an arbitrary fashion. There is no appeal against the assessment; there can be no redress. I have already suggested to the Minister that as a first step we should ask taxpayers to declare their gross earnings and then we should take on the business of assessment, imposing penalties for false declarations —Yes, just so.... Let me tell you this. Nobody has permission to alter even one word of the text. Unfavourable opinions are not welcomed. The bill is the creation of the Prime Minister. —I would be prepared to talk to him if I have to. —I do not advise it. Just then I was summoned by the Finance Minister. As usual, Fuat Agrali was irritable. Next to him stood Mumtaz Tarhan, the Director of Finance in Izmir. He, too, was required to play a similiar role to mine in the execution of the law in Izmir. The three of us then proceeded to the office of the Prime Minister. A@rali introduced us to Saracoglu adding: ‘These are the two young men who will apply our law in Istanbul and Izmir’. The Prime Minister turned to me and asked: ““What is the climate like in Istanbul?’ Obviously he was referring to the reaction of the people of Istanbul to the tax measure. ‘Apprehensive . Indecisive . . . Moving towards a storm’, I replied. He smiled. ‘What are the profiteers and merchants doing?’ ‘They are busy praying for our country’. [Agrali laughed. It seemed as if I had passed the first test. But the pleasure did not last long.] “Yes, Sir.’ ‘Did you like it?’ ‘I have some comments. . . .” Saracoglu frowned. ‘Like what?’ The amount of TL300 million is required from me According to the Bill this figure is to be collected within fifteen days, at the most within a month’s time. I worry that the taxpayers might not be able to find the cash to pay it at such short notice. Both the Prime Minister and Agrali were disturbed by my response. Sacracoglu said: The issue is interconnected with our price policy, young man. I shall put the commodities on the market. What you think may be probable. I have taken that probability into consider- 22THE CAPITAL TAX ation. When our price objectives are realised I shall allow you all the delay you wish. . . . With these words the interview was over. Outside I expected to be rebuked by Agrali, but to my surprise he appeared very content. This gave me the impression that he was pleased that someone had. at last had the courage to tell the Prime Minister what he had felt all along but did not have the courage to tell. It is because of this that do not believe that he played an active role in the conception of the Varltk law. As the final touches of the Bill were being put together, the legal expert of the Foreign Ministry, Emin Sipahi, warned the Prime Minister about the reaction of the foreign embassies which would undoubtedly bombard Ankara with diplomatic protest notes. In reply, Saracoglu said: ‘Friend, I am not an Ottoman Vizier. They cannot forward such protests to me.’ Later on, both C. Tiizel and E. Sipahi confirmed the validity of this statement. The same night I returned to Istanbul. The following week the draft Bill was approved by the Republican Party Assembly Group and by the Grand National Assembly. Some criticism is said to have been voiced among the deputies during the secret party session, but in the Assembly the debate was low-key. On both occasions Premier Saracoglu defended the Bill and, as at least fifty deputies have since told me, singled out the non-Muslim minorities as the hoarders and war-profiteers. The impression given by the Premier that the tax measure was waged solely against the minorities was certainly very strong. Later, many deputies, indignant about the fact that taxes were also levied on Turks, argued that this violated the assurances given by Saracoglu. Similarly, a number of governors refused to collect taxes from Muslim Turks. The situation became so serious that the Finance Minister had to intervene personally and explain that the Turks would also have to pay at least a token levy. In this way Agralt succeeded in giving the Capital Tax the facade of a uniform fiscal measure. Under these circumstances the Prime Minister had little choice but to toe the line. THE LAW ANDITS AMENDMENTS The Capital Tax was passed on 12 November 1942 as Law No.4305. The amendments, Laws No.4501 and 4530, were added on 17 23THE CAPITAL TAX September 1943 and 15 March 1944 respectively. By Law No.4501, the Finance Ministry was authorised to cancel the uncollected debts of taxpayers engaged as private employees and pedlars. By law No.4530 the Capital Tax was abolished altogether, releasing defaulters from their forced labour and writing off amounts still unpaid. On 12 January 1943 the Council of Ministers approved Regulation No.21/19288 de- creeing forced labour for non-payment of the Capital Tax. The Varltk law was made up of 17 articles. In the preamble, the levy was declared to be ‘aimed at those who have amassed inflated profits by exploiting the difficult economic situation, but do not pay commensurate taxes. Its purpose is to compel them to participate in the sacrifices demanded by the ex- traordinary circumstances in which we find ourselves, to an extent commensurate with their profits and capacity.” The government which enacted the Capital Tax law was made up of Siikrii Saracoglu, Numan Menemencioglu, Ali Riza Artunkal, Recep Peker, Fuat Agrali, Hasan Ali Yiicel, Ali Fuat Cebesoy, Hultisi Atalas, Raif Karadeniz, Sevket Rasit Hatipoglu, Fahri Ergin and Behcet Uz. The President of the Council of State was Ismet Eker, while the minutes were kept by Sinasi Devrim and his secretary Hayri Ulkiimen. Other members of the Council of State were: Izzet Akosman, Nurullah Esat Siimer, Feridun Fikri Diigiinsel, Galip Kahraman, Ismail Sabuncu, Miikerrem Karaagag, Faik Baysal, Omer Tasctoglu, Selah Yargi, Galip Giiltekin, Mahmut Nedim Zapqi, Faik Kurtoglu, Kemalettin Kamu, Fuat Sirmen, Cemal Koval, Faik Barutcu and Sami Cogar. They all signed the minutes, and none expressed opposition. Key points of the tax The law addressed itself to capital earnings and extraordinary profits. It was designed for the wealthy classes, i.e., the busi- nessmen and the large landowners whose annual income ex- ceeded TL2,500 and whose immovable property was valued at over TL5,000. The tax was also to affect company shareholders. A taxpayer falling in any of the three categories might be liable for taxation separately on all three counts. The maximum and minumum assessments for business companies were pre-fixed, though the amounts to be paid by individual enterprises were 24THE CAPITAL TAX left to the discretion of local assessment boards. Members of these boards were to be chosen by the highest civil functionary in the district, by the head of the district Finance Office and by municipal officers. The taxes had to be paid in cash within a fortnight. Another fifteen days were allowed, but with the penalty of increasing the original amount by 1 and 2 per cent respectively. In the event that the tax was still unpaid at the end of thirty days, the entire property of the taxpayer and his next of kin was to be confiscated and he himself sent to a forced labour camp. No appeal against the assessments was provided for. The property of those who could not pay was to be sold at public auction. In fact, the law was a disaster and had nothing in common.with an ordinary fiscal measure. It aimed at touching every taxpaying category, focusing its attention on profits, salaries and real estate. The inclusion of large farmers within the law was an indication that the government was worried by the cereal shortages and was determined to combat speculation in this field. As has been shown above, a fiscal measure of this magnitude cannot be applied in a country without an income tax structure. The Varhk affair went sour from the very beginning, when the local assessment boards levied taxes in an arbitrary and discriminatory fashion. The stipulation of the law decreeing that the decisions of the local assessment boards were final, and not subject to appeal or redress, constituted a flagrant violation of the basic laws of finance. Similarly, it was wrong to block all recourse mechanisms during the implementation of the tax. The clause concerning the confiscation of property belonging not only to the taxpayer but also to his next of kin, if he failed to fulfil his fiscal obligations, went against every basic legal principle. Equally preposterous was the stipulation that the taxpayer who did not discharge his liability was to be automatically sentenced to hard labour, with its small pay credited to the tax account. In practice, a defaulter who was called upon to pay TL100,000, would have had to undertake hard labour for over 250 years in order to clear his debt. Hundreds of defaulters deported to labour camps were taxed at well over TL100,000. Special provision for exemption from forced labour was made for people over the age of 55, government and municipal functionaries and women. According to the law regulating de- portation, taxpayers were divided into three categories: 25THE CAPITAL TAX i) those who made no payment whatsoever towards their assessment; ii) those who made a partial payment but concealed their movable property; iii) those who did not conceal their movable effects and who demonstrated a genuine attempt to meet their assessments. Tax defaulters serving with the colours were to be transferred to the forced labour camps on completing their military service. Under law No.2/20206 deportees who were in ill-health might receive free treatment at the state hospitals at their place of exile. The government undertook to provide for the main- tenance of deported taxpayers during their transfer to their ultimate destination, but the deportees would have to clothe and feed themselves during their forced labour. Defaulters would be obliged to work until their debts to the state were fully paid. PREPARING ENFORCEMENT OF THE TAX On my return from Ankara I began work feverishly. A couple of days later Sevket Adalan arrived in Istanbul. We were both aware that the Bill was about to be submitted to Parliament. Finally on 12 November 1942 it appeared in the Official Gazette. But we had no official tax-rolls. The only lists we had were the rough estimates we had presented to Ankara to enable the Ministry of Finance to formulate an opinion about the taxable wealth in Istanbul. Thad asked every single local board for lists of all those liable to wealth tax, stressing that there should be separate lists for the Muslim Turks and the non-Muslim Greeks, Armenians and Jews. Meanwhile, it became clear that the Republican People’s Party itself was to participate in the implementation of the Varhik tax. Indeed, with the participation of the Governor, the RPP inspector in Istanbul and other party members, the Varhk assessment commission met at the premises of the Physical Training Centre at Siraserviler. Of the participants I knew only Nemlizade Mithat Bey. Sevket Adalan was acquainted with Ferit Hamal and Bican Bagcioglu. The RPP representative Suat Hayri Urgiplii was an energetic and intelligent young nationalist who adhered firmly to the views of the Prime Minis- 26THE CAPITAL TAX ter. Governor Kirdar gave the impression of a man who was reluctantly drawn into the whole affair. The rest of the members came from the ranks of the old Union and Progress Party. It was beyond any doubt that the overwhelming majority of the members of the commission strongly supported the line advocated by Premier Saracoglu. Without losing any time we agreed on all the main points. We were all aware of what was expected of us. We now had to sort out the details. The rates that were to be set for the estimated taxes were to come directly from the Ministry of Finance. The same night Governor Kirdar and Sevket Adalan went to Ankara to explain the situation in Istanbul to both President Inénii and premier Saracoglu. In effect, little was achieved by this effort. Following this trip, however, the government sent Cemal Yesil, an adviser of the Prime Minister, to Istanbul for a week. Soon after his arrival in Istanbul, Cemal Yesil became aware of the seriousness of the situation and refrained from any involvement in events as they developed. Sevket Adalan, chief of the inspection board As we had agreed with the Finance Minister, the Finance In- spection Board was to assume a key role in the imposition and enforcement of the Capital Tax. In essence, I was the senior inspector in charge of the Administrative Finance Board. At this point, I would like to comment on the personality of Sevket Adalan. It is generally held that the advancement of his career was closely linked to the Varlk Tax and that he was responsible for its imposition and application. In reality, how- ever, although he did assume responsibility for it, Adalan was never one of the protagonists in the Varhk episode; he was a senior civil servant who managed to put the orders of his super- iors into effect with great success. Adalan was not a man of letters. Throughout his career, first as Chief Inspector and later as Minister, he showed little inter- est in literature. His talents were discovered by Finance Minis- ter Agrali, who in turn helped to advance his career. He did not create the Capital Tax, though he was certainly the one to put it into force. Undoubtedly, it was Adalan who set up an efficient apparatus for the swift collection of the Varlik tax. A major flaw that I detected in his personality was his lack of 27THE CAPITAL TAX courage and his softheartedness. I still remember how one cold winter day I was interviewing taxpayers who were assessed at over TL100,000 and who had not paid the required one third of the tax. I had Adalan next to me. We had to write down the names of the defaulters and send them to the Governor. This was the first list of defaulters who were to be condemned to forced labour. Amongst them were well-known members of the non-Muslim minorities, such as Gad Franco, Sekip Adut and Faraci. With the consent of the Governor, I had to send the list of defaulters to the Chief of Police. On our arrival at the police station we were faced with many arrested defaulters who were preparing to be deported. Sevket Adalan could not go any further; he was pale and nervous. He said: — Icannot continue; I have to leave. — What has happened to you? — [beg you, Let’s adjourn the meeting till tomorrow morning. I would like to go back to Kadikéy. Adalan was worn out and desperate, so much so that I thought it unwise to let him go home alone. One of the results of postponing the meeting was a delay in the deportation of the first group who were kept under surveillance in hotels at Moda. Next day the news appeared in the press. The Minister of Finance was furious over the whole affair. Mainly because of his softhearted nature, Adalan gradually withdrew from the scene, particularly during the dreadful days of the enforcement of the Varltk tax. In my opinion, Adalan’s greatest contribution to the whole affair lay in his ability to handle the quick-tempered and demanding Finance Minister Agrah successfully. The worries of Professor Fazil Pelin The day that the details of the law were published in the press, my former Professor at the faculty of Economics, Fazil Pelin, tele- phoned me early in the morning to ask for an explanation. Pro- fessor Pelin was very fond of me and it was on his advice that I entered the Finance Ministry. Concurrently, he helped me get a job as a lecturer in the faculty of Economics at the University and we always had discussions on financial questions. That morning the professor was apprehensive: 28THE CAPITAL TAX — Faik, my boy, the text of the capital tax appeared in this morning’s paper. — Yes, Professor. — Naturally, the journalists got it wrong, they have an in- complete text. — No, in all the newspapers I saw the text was complete. — How so, complete? No provision for objections or appeal! No indication of the rate of taxation — That is the kind of tax it is, Professor. — My boy, have you all gone mad! During the period of the execution of the tax I often asked myself the same thing. I am sure that future historians will ask exactly that question. I would answer them in the same way that I replied to my Professor: I am not the architect of the law. I am not the person competent to answer. I was only involved in the application of the tax and for this I accept my share of the blame. I leave it to my readers’ conscience to decide how else such a law could have been applied. The Capital Tax could have been applied with forbearance. We, who were charged with its application, simply played the role expected of us. Teams and inspectors who imposed the tax The responsibility for setting the tax rates fell to the Finance Ministry. Adalan and I simply organised the teams that were to impose the tax. The local assessment boards had already separ- ated those who paid into a non-Muslim Greek, Armenian and Jewish category. The taxpayers were ultimately divided into the following categories: i) Greek, Armenian, Jewish taxpayers. Those with extraordinary wealth. Those with medium wealth Those who submitted a tax statement on their gross earnings. Those income earners who paid profits tax Pedlars. Salaried private employees. 29