Wealth Tax- 1942

[Joseph]

Istanbul, November 12, 1942
While much of the recent news in the media have addressed current events or events that took place during a period leading to the First World War, we should not forget that today is the 64th anniversary of a horrible event that struck Armenians, entrepreneurs in particular, in Istanbul. Indeed, I would be remiss if I did not say a word or two on the treatment of Armenian and other minority (jewish, greek, and assyrian) businessmen in Turkey during the Second World War.

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.

Faik Okte, the administrator of this tax at the Turkish Ministry of Finance wrote a book on the subject documenting all of its features and naming its victims. The book has been translated from the Turkish "Varlik Vergisi Faciasi" into English and is entitled "The Tragedy of the Turkish Capital Tax," by Geoffrey Cox, Croom Helm, 1987.

Because the tax was at best arbitrary, the effective tax rates that businesses had to pay fluctuated widely. The assessed tax often exceeded the entire wealth of business owners which inevitably led to their deportation to labor camps in addition to the confiscation of their properties. C.L. Sulzberger, writing for the New York Times, documented how burdensome this tax was, and in particular the pain it inflicted on the Armenians. See below:

Effective Tax Rates by Religious and Ethnic Affiliation
Merchants by Affiliation ...... Tax Rates (%)
Muslim Merchants ..................... 4.94
Greek Orthodox Merchants...... 156.00
Jewish Merchants.................... 179.00
Christian Armenian Merchants 232.00

Source: C.L. Sulzberger, “Turkish Tax Kills Foreign Business,” New York Times, September 11, 1943.

[Joseph]

Turkey's Brutal WWII-Era Wealth Tax
Copyright © 2005 Tax Analysts
Tax Notes International Magazine

September 5, 2005

WORLDWIDE TAX OVERVIEW
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).

...

THE ULTIMATE DEATH TAX (page 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 tax.

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 government.

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 citizens.

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 press."/14/

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 camps.




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.


FOOTNOTES

/1/ Faik Okte, The Tragedy of the Turkish Capital Tax, translated from the Turkish Varlik Vergisi Faciasi by Geoffrey Cox, Croom Helm, 1987.

/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).

[Joseph]

In May 1941, large numbers of young men ranging in age from 18-38 were conscripted into the Turkish army from the Greek, Armenian, and Jewish communities. The Turkish intention was to exterminate these young men through the well-known method of "forced-labour battalions" (sound familiar?). If this extermination plan was not successful it was due to protests from the Western allies and the defeat of the Germans in Stalingrad in December 1942. Seeing the tides of war shifting, the Turkish authorities permitted the discharge of these soldiers.

On November 11, 1942, the Turkish government passed a law regarding
taxation of property of non-muslims, known as the VARLIK VERGISI. Through this law, non-muslim citiizens had to submit, without the right to appeal, to the discretion and arbitrary judgment of the tax clerks. The tax clerks, in turn, were instructed to appraise property at amounts many times over the actual value of each property. Then, if the individual concerned was unable to make payments of the enormous tax share (quota), the property was seized and the unfortunate owners were exiled to ACKALE, in Anatolia- a labour camp.

[Gavur]

My uncle did 6 years.

[Joseph]

My uncle did 6 years.

My wife's uncle died in a camp though we are not sure how (I guess it doesn't really matter if it was through slave labor, tb or anything else). But not before the state took over his business, seized his assets, raided his warehouse etc. He was in the silk trade. The rest of his immediate family fled to Marseilles.

Can you tell us about your uncle's experiences?

[Gavur]

My wife's uncle died in a camp though we are not sure how (I guess it doesn't really matter if it was through slave labor, tb or anything else). But not before the state took over his business, seized his assets, raided his warehouse etc. He was in the silk trade. The rest of his immediate family fled to Marseilles.

Can you tell us about your uncle's experiences?

I don't know ,as a child I remember him going to Germany in 1960 and died there after he retired .
My grandmother used to tell me she would carry him food.
He was a tall and a strong man,she was afraid he'd go hungry (Armenian mother's heart)so every few months she would start a journey through Asia minor (a week's journey) and bring him food supplies by herself, being a women and a survivor of Genocide she would risk herself and the allready orphaned family she would strand behind,but her son's well being gave her the strenght and courage she needed,in away she served with him.
I don't think anyharm could have come to my uncle while she was around,she was of course determined not to let him be the 151rst sacrifice of her massacred 150 unit family of Bursa.

[Joseph]

I don't know ,as a child I remember him going to Germany in 1960 and died there after he retired .
My grandmother used to tell me she would carry him food.
He was a tall and a strong man,she was afraid he'd go hungry (Armenian mother's heart)so every few months she would start a journey through Asia minor (a week's journey) and bring him food supplies by herself, being a women and a survivor of Genocide she would risk herself and the allready orphaned family she would strand behind,but her son's well being gave her the strenght and courage she needed,in away she served with him.
I don't think anyharm could have come to my uncle while she was around,she was of course determined not to let him be the 151rst sacrifice of her massacred 150 unit family of Bursa.

Your grandmother was very courageous. Thank you for sharing that.

[bell-the-cat]

...the unfortunate owners were exiled to ACKALE, in Anatolia- a labour camp.

It was Aşkale (Ashkale) at the junction between the Trabzon to Erzurum and Erzincan to Erzurum roads.