Introduction
The failure of the second siege of Vienna in 1683 by the Ottoman Empire not only put an end to the common perception of Ottoman superiority in Europe, but also marked the beginning of land losses for the Empire.[1] From this year on, the Empire tended to lose the overall political and economic superiority even though it gained lands and political dominance to some degree. Moreover, the long peace period which would last from 1739 to 1768 as well as the economic expansion in the first 60 years of the 18th century resulted in failure rather than a restoration or reform. Even the success in the Pruth River Campaign in 1711 was not able to make up for the land losses in the Treaty of Karlowitz in 1696. This period of military defeats seemed to have ended about a hundred years later, in 1798, when Napoleon invaded Egypt.[2]
Even though the state put into effect certain practices like malikâne in order to repel financial pressures and switch to monetary economy towards the end of the 17th century, the only state budget which had budget surplus out of all seven budgets from 1660 to 1701 was the 1701 budget.[3] These reforms the Ottoman society and bureaucracy carried out in the areas of monetary institutions and public financing enabled the Empire to maintain its power only for a certain period of time.[4] Despite the military defeats and financial problems experienced towards the end of the 17th century, the first half of the 18th century became a period of economic revival for the Ottoman Empire. From 1700 to 1750, the lost lands were partially reclaimed. All the sectors in the economy, such as agriculture, manufacturing and trade improved, and the amount of investment was on the rise. Even though it is of no doubt that some new taxes being introduced and the sources in timar being transferred into mukataa played a certain role in the fact that the state budget revenue went from 10 million kuruş to 14,5 million kuruş in the periods of 1700- 10 and 1700-65, the main reason was this economic improvement.[5]
The second half of the 18th century, contrary to the first, witnessed the deterioration of the economic and financial situation. So much so that, the Cretan War, which started in 1645 and lasted 25 years, signified the beginning of the period of everlasting, costly wars. However, although Ottoman statesmen implemented some innovations, they generally sought solutions to financial problems not by increasing the volume of production and trade, but by rearranging how they would distribute the income, and they became overly dependent on financial problems. This policy only made the existing structure more stagnant rather than delivering any kind of solution.[6]
Towards the end of the 18th century, especially during the reign of Selim III (1789- 1807), the Empire was in a state of financial and military crisis. As much as the wars being fought against Russia in the second half of the 18th century played a role in this crisis; France invading Egypt in 1798, the Serbian uprising in 1804, and the Russian wars after the year of 1806 also had an impact.[7] Increases in prices went beyond %200 from 1760 to 1800. During the ten-year period from 1790 to 1800, the yearly price increases reached %5 threshold as never before. The yearly expense amount went up by %30 between 1761 and 1785, and %100 during the years of war. In parallel with this increase in expenses, tax revenues of the budget remained stagnant because of the shrinking economic activity despite new sources of tax being added and the current tax rates being increased.[8]
However, the decline in real production levels and the insistence on the financial tradition of the classical period were not the only reasons for financial disruption. It is certain that the conditions of the domestic and international conjuncture had an impact on economic and financial disruption as well. Among these conditions were the increase in military expenses, excessive state bureaucracy, domestic insecurity, uprisings, banditry practices, different forms of corruption, the weakening of the central authority, migration from rural areas to cities, transformations in world trade, movements of money in the world, and the fact that the countries which used to form the counter-Ottoman group turned up the pressure by gaining power.[9]
The end of the 18th century and the beginning of the 19th century became an era of reforms in the Ottoman Empire.[10] Some military innovation efforts started by Abdulhamid I (1774-89) were maintained by Selim III. When the reforms carried out by Selim III in the military were met with negative reaction by the traditional structure, they were completed by Mahmud II (1808-39). Mahmud II became relatively more successful in terms of making the country more open to the developments in the West by transforming not only the military, but also the central administration, media activities, the treasury, and clothing habits. The Imperial Edict of Gülhane (Tanzimât Fermânı), declared at the time of Abdulmecid I (1839- 61) in 1839, was a representation of the peak point of these reforms.[11]
The financial structure of the Empire had its share of these reform movements as well. The central administration of the Ottoman Empire diversified the new tax-collection methods started towards the end of the 17th century by transferring income from the private treasury to the central treasury, müsadere (confiscation) practices, debasement, taking precautions against squandering, domestic and foreign indebtment, and rendering new pieces of land available for esham. However, one of the most prominent policies to fix the financial structure was imposing new taxes. Extraordinary monetary taxes collected under the name of imdadı seferiye during the times of war, and imdadı hazariye during the times of peace were accompanied by types of tax-in-kind such as nüzul and sürsat. [12] These taxes which were collected in a state of emergency would soon turn into regular taxes, and new taxes would be added to these in accordance with innovation efforts.
One other factor leading to the diversification of taxes was the foundation of the treasury of irad-ı cedid in 1793. Among these taxes, a significant one was tax of zecriye, which was an old type of tax collected on alcoholic drinks. Though this tax was legislated away as alcoholic drinks were occasionally prohibited, it was put back into effect on April 4, 1792 with the foundation of the new treasury.[13]
Imposing new taxes was not the only thing done by the Ottoman administration in order to overcome the financial difficulties; it was also aiming to raise state revenues by increasing tax rates. For instance, when tax of zecriye was brought to state agenda again in 1792, taxes laid on wine and raki per kıyye[14] were increased as per the additions introduced in 1810, 1822, and 1831 (Table 1). The Ottoman administration must have hoped to raise the revenues of the central treasury with these tax additions.
The first mention of the correlation between tax revenues and increase in tax rates was in Kitābu lʻibar (Muqaddimah) by Ibn Khaldun.[15] Khaldun pointed out that the correlation between tax rates and tax revenues would not always show a linear trend, but increasing tax rates, after a certain point, might cause a decline in tax revenues. A similar correlation was re-studied by Arthur Betz Laffer in the second half of the 20th century. The result obtained from this study was identical to the result Khaldun ended up with. Accordingly, increases in tax rates could possibly reduce, rather than raise, tax revenues when beyond a certain level. In other words, it might at times be necessary to decrease tax rates instead of increasing them in order to raise tax revenues; increasing tax rates in order to raise tax revenues was not guaranteed to turn out well for the economic structure. Even though the correlation between tax rates and tax revenues is a matter of mild controversy, some historical data in the USA and England confirmed that there was a correlation between the two.[16]
According to Arthur B. Laffer, change in tax rates would have two effects, namely arithmetic and economic. Arithmetic effect meant that increase in tax rates would raise tax revenues; decrease in tax rates would reduce tax revenues. That is, there was a linear correlation between tax rates and tax revenues. On the other hand, economic effect meant that decreasing or increasing tax rates could affect tax revenues in the opposite direction by affecting production (investment), employment and tax assessment. Laffer thought that this was the reason why there were two tax rates between 0 and 100, one being high and the other being low, which would generate the same amount of tax revenues.[17] (See, Graph 1, TR4 and TR5 points).
This study is aiming to answer the questions of in what ways the tax additions by the Ottoman Empire in 1810, 1822 and 1831 on wine and raki brought to Istanbul affected tax revenues, and where the Ottoman economy stands on the Laffer curve. In other words, the purpose of the study is to investigate whether the Ottoman Empire, which wanted to raise its tax revenues, was able to do so by increasing the tax rates on wine and raki, and whether these additions were actually necessary to impose in this regard.
To answer these questions, by applying the T Test to the tax revenues of the periods before and after the tax increase, this study will pin down the direction of growth or decline in tax revenues as well as whether it was the tax rates or external factors, which in this study are assumed stable, that caused the change. All in all, the efficiency of the Ottoman policy of increasing the tax rates on wine and raki will be tested as well.
1. Processes and Methodology of the Study
This study has been composed of data from 55 archived sources (books and documents) in Istanbul Presidential Ottoman Archive (BOA). Available data include detailed records of wine and raki a number of merchants brought to Istanbul in the period from 1792 to 1839. In these records were processed the name of the merchant who brought the wine or raki, the amount of the good brought, and the amount of taxes these goods were subject to based on the currency and weight unit used in the Ottoman Empire. In this period, it is observed that wine and raki were taxed per kıyye (1 kıyye=1,283 kg) in pare (1 kuruş=40 pare), and that the tax rates on both wine and raki were increased in 1810, 1822 and 1831.
In order to use the data in the documents statistically, following the transcription of the documents, all data processed within Hijri calendar whose records were kept on a daily basis have been arranged according to the Gregorian calendar on a monthly basis. Moreover, the data related to the goods measured in kıyye and taxed over this weight unit in pare have been converted to kilogram and kuruş. Because the taxes collected on wine and raki being nominal requires deflating the inflation, the amounts of nominal taxes have been turned into real taxes using the consumer prices index.[18] (See: Table 2 and Appendix).
In Table 2, the tax rates per kilogram of wine and raki in the period from 1792 to 1839, nominal and real additions to these rates as well as the average tax revenues in taxation periods have been calculated, and the findings obtained have been demonstrated in the graphs. To be able to determine whether the decline in the average tax revenues is statistically meaningful, the T Test has been applied to both wine and raki revenues based on annual tax revenues before and after the tax additions in 1810 and 1822. This way, it has been tested whether the decline in the tax revenues of wine and raki following the increase in tax rates is statistically meaningful. The meaningfulness obtained through the T Test shows that the increase in tax rates is directly related to the decline in tax revenues; meaninglessness, on the other hand, shows that not the tax rates, but the external factors assumed stable cause the decline in tax revenues. Thereby, it has been possible to figure out where the Ottoman economy stands on the Laffer Curve in cases where there is meaningfulness between increase in tax rates and decline in tax revenues, and whether it was really a necessity for the Ottoman administration to increase the tax rates.
While doing these, the study has been grounded upon some assumptions and limitations, which are as follows:
⁂ This study takes into consideration only the correlation between tax rates and tax revenues in the period from 1792 to 1839. Therefore, it has limitations in terms of both time and goods.
⁂ In the period from 1792 to 1839, despite there being three tax additions (1810, 1822, 1831) in wine and raki, the correlation between the increase in tax rates and the change in revenues in 1831 has not been incorporated into the analysis. This is because even though the first two tax additions (1810, 1822) were above the increase in the general level of prices, the one in 1831 was below it. In other words, the tax rates in 1810 and 1822 increased in real terms; however, the tax rates in 1831 increased only nominally, but decreased in real terms. (See: Table 1).
⁂ In this study, the variables which affected tax revenues such as wars, land losses, changes in the costs of production and transport, climate irregularities, social unrests, uprisings, legal regulations, and developments in international economy and political conjuncture have been taken as external factors. Hence, these factors are the cause for the decline in tax revenues in cases where there is meaninglessness in the T Test; yet, in cases where there is meaningfulness, the increase in tax rates is the cause for the decline in tax revenues.
2. Analyzing of The Relations Between Tax Rates and Tax Revenues: T Test
The Ottoman State put zecriye tax collected on wine and raki back into effect in 1792 so as to overcome the financial difficulties it was going through. It started collecting 0,039 kuruş of tax per kilogram of wine, and 0,078 kuruş per kilogram of raki from 1792 to 1810. Nonetheless, in 1810, 1822 and 1831, it decided to increase the tax rates on these two goods at varying rates.
Table 2 demonstrates the tax rates on wine and raki, the increase in these rates (nominal and real), price index, price increase rates, and the averages of the tax revenues in the taxation periods from 1792 to 1839. Analysis of the averages of the tax revenues of both wine and raki in each taxation period shows that tax revenues tended to decline from 1792 to 1839. (See Graph 2 and 3). Although this decline at first seems to have been caused by the increase in tax rates, to confirm this statistically and determine whether the decline in tax revenues occurred because of the increase in tax rates or other external factors apart from tax rates, it is necessary to investigate whether the decline is statistically meaningful by applying the T Test to the tax revenues before and after the tax increase years of 1810 and 1822.
Through the T Test whose results are shown in Table 3, it is calculated whether there is any meaningful and statistical relation between the tax additions in 1810 and 1822 and tax revenues. Accordingly, tax revenues collected on wine and raki in the period from 1792 to 1839 have an overall tendency for decrease. Looking at the increase in average, it is seen that only the tax addition in wine in 1810 might have raised tax revenues.
The cause for the growth in the tax revenues of wine in 1810 is not the increase in tax rates; it is the external factors that determine tax revenues. So much so that, the result obtained from the T Test marks this increase as meaningless; that is, there is not any correlation between the increase in tax rates and the growth in tax revenues. Nevertheless, the cause for the decline in the tax revenues of raki in the same year is the increase in tax rates, which means the result obtained from the T Test is meaningful. So, it must be noted that the Ottoman economy stands on the first region of the Laffer Curve in regards to the increase in the tax rates on raki in 1810. (See: Graph 1).
In other words, Ottoman statesmen should not have increased the tax rates on raki in 1810; on the contrary, they should have decreased it. Yet, Ottoman statesmen chose to increase tax rates in order to avoid the financial pressure they were exposed to, which brought along with it not a growth in the tax revenues gained from raki, but a decline in accordance with Laffer theorem. That is to say, Ottoman statesmen pursued a policy that they should not have.
On the other hand, the cause for the decline in the tax revenues of raki in 1822 is not the increase in tax rates; it is the external factors that determine tax revenues. Nevertheless, the cause for the decline in the tax revenues of wine in the same year is the increase in tax rates. So, it must be noted that the Ottoman economy stands on the first region of the Laffer Curve in regards to the increase in the tax rates on wine in 1822. (See: Graph 1). In other words, Ottoman statesmen should not have increased the tax rates on wine in 1822; on the contrary, they should have decreased it. Yet, Ottoman statesmen chose to increase tax rates in order to avoid the financial pressure they were exposed to, which brought along with it not a growth in the tax revenues gained from wine, but a decline in accordance with Laffer theorem. That is to say, Ottoman statesmen pursued a policy that they should not have.
Conclusion
All in all, the conclusion obtained from this study is that there was an overall tendency of the tax revenues of wine and raki to decline in the Ottoman economy,[27] and this decline was caused sometimes by the increase in tax rates, other times by other factors that affect tax revenues. Only in 1810, there was a growth in wine revenue, yet this growth was not caused by the increase in tax rates but by external factors. Therefore, it is safe to say that the Ottoman central administration’s decision to increase tax rates in order to come out of financial depression failed. In other words, the Ottoman central authority marked up the prices of raki in 1810, and wine in 1822 while it should not have done so. The increase in the prices of wine in 1810, and raki in 1822 failed to have any impact in terms of raising tax revenues because of external factors. The most general conclusion is that tax additions did not raise the incomes of the Ottoman central treasury, but it reduced it on the contrary. Yet, it is clear that more comparison is required among tax rates and tax revenues of more goods to be able to generalize this conclusion.
APPENDIX
Tax Rates, Tax Revenues and the Amount of Wine and Raki Transferred from Ottoman Interior to Istanbul (1792-1839)*
BIBLIOGRAPHY
Archival Sources
Presidential Ottoman Archive (BOA)
Cevdet İktisat (Cİ): 31-1511.
Cevdet Maliye (CML): 303-12322; 442-7847; 265-10841; 260-10694; 290-11877; 3-124; 360-14741; 400-16240; 401-16490; 546-22436; 658-26905; 662-27072; 696-28491; 355-14574; 402-16509; 444-17903; 110-4870.
Bab-ı Defteri Başmuhasebe Defterleri (BŞM.d): 07462; 07646; 07773; 07862; 08328; 41869; 9446.
Bab-ı Defteri Başmuhasebe Zecriye Kalemi Defterleri (D. BŞM. ZCR.d): 20262; 20300; 20310; 20310; 20326; 20331; 20332; 20334; 20351; 20371; 20384; 20442; 20453; 20491; 20505; 20510; 20518; 29439; 20478.
Kamil Kepeci (KK.d): 05487; 5502; 5503; 5504; 5507.
Maliyeden Müdevver (MAD): 0738; 01699; 4051; 5600; 6507; 6507.
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