Fritz Neumark

Fritz Neumark and Germany

Fritz Neumark was born in 1900 in Hanover, Germany.Among the four émigrés he was perhaps the most important contributor to the modernization of Turkey’s public sector. He was dismissed from the University of Frankfurt on September 1, 1933 and left Frankfurt on September 22 of the same year. He went to Switzerland and in the presence of the Turkish Ambassador Cemal Hüsnü in Geneva signed a renewable five-year contract (October 15, 1933 to October 15, 1938) to teach social hygiene and statistics. He went to Istanbul via Italy and Greece. He was among the first wave of émigré professors. Neumark learned Turkish to perfection, began to lecture in Turkish within two years, published prolifically in Turkish, German, English and French. His contract was renewed an he became a Turkish citizen. His stay lasted until 1951. In 1952 he was offered the chair of public finance at the University of Frankfurt. Germany was ready to return his German citizenship in March 1952, which he rejected at first and accepted when he became the University Chancellor in July 1954, a post to which he was elected twice. He retired in 1970 and moved to Baden-Baden in 1984 where he died in 1991.

In Turkey

Neumark’s field of expertise was neither social hygiene nor statistics. He was an economist specializing in public finance. Soon Professor Ömer Celâl Sarç took over the course of statistics and he was relieved from teaching social hygiene. He was named professor of economics and public finance at the Faculty of Law. Subsequently the discipline of economics separated from the Law Faculty and became an independent faculty where Neumark occupied the Chair of Public Finance. He became the director of the Institute of Public Finance which was created in 1946 within the Faculty of Economics.

Among his most important publications written while he lived in Turkey are Neue Ideologien der Wirtschaftspolitik (New Ideologies of Economic Policy), a two-volume General Economic Theory (which had several printings), the first volume of History of Economic Thought, and Gelir Vergisi (Income Taxation) which had three printings of 3,000 copies each, Theorie und Praxis der modernen Einkommensbesteuerung (Modern Income Taxation: Theory and Policy), and Beiträge zur Geld- und Finanztheorie (Contributions to Monetary and Fiscal Theory) . In 1939 he founded and edited the İstanbul Üniversitesi İktisat Fakültesi Mecmuası (Revue de la Faculté des Sciences Économiques de l’Université d’Istanbul) which published articles by his colleagues in Turkey as well as abroad in Turkish, French, German and English with whom he maintained contact. He was co-founder of the International Institute of Public Finance of which he was the president from 1956 to 1959.

In addition to his courses at the university, Neumark gave a series of lectures in the provinces. His objective was to educate and increase the knowledge of the government staff as well as of the population in general. These lecture trips provided him with the opportunity to familiarize himself with the economic structure of the country in which he had taken refuge.

Neumark as advisor to Turkish ministries

The information gained on his field trips was used in his analyses contained in the frequently requested reports he submitted to various ministries. Of these agricultural and industrial problems, planning and etatism, public administration, monetary policy, taxation were among the most important and his opinions on several issues were very much sought as an advisor.

He noted the large role that the inefficient agriculture played in Turkey’s national economy and suggested that land holdings be redistributed and productive technology be improved. He was in favor of encouraging industrialization, especially in the areas of textiles and food production. He felt that the mining industry should be expanded and claimed these areas could be improved by subsidizing industrial enterprises and/or establishing state industrial enterprises in the respective fields. He did not oppose etatism which he considered justified to a certain extent, since the republic was very young and foreign monopolies were still restricting sovereignty in economic policy. But he was against excessive etatism, since private enterprise was emerging. Moreover, the intrusions in the trade policy were slowing down and raising the cost of both the exports of agricultural products and the imports of equipment. Neumark undertook great responsibility when Minister Nihad Erim assigned him the task of preparing a report on the rationalization and modernization of Turkey’s public administration. To comply with this task he took a sample of the administrative institutions where reform was particularly required and conducted research in Ankara for several months into administrative changes that would have been politically acceptable. The result was his 1949 report “Devlet dairesi ve müesseselerinde rasyonel çalışma esasları hakkında rapor” (Report on the Principles for Rational Processes in Public Offices and Institutions) which directed the investigation of the causes that called for substantial reform. These were the imbalance in the employment in public offices and enterprises and lack of networking among them, inefficient management, lack of inspection and transparency in economic and fiscal operations. This was a very analytical and important report. However, in 1950 the helm of the government changed hands and the new party in power had a different agenda.

Another opportunity for Neumark to express his opinion about Turkey’s economic policy occurred shortly after WWII ended. The Director of the Istanbul branch of the Central Bank was interested in Neumark’s opinion of devaluating the Turkish lira. He wanted to know whether, and if so to what extent, it should be devalued. Neumark presented a brief report on the issue. The Parliament convened shortly after the submission of his report and the Prime Minister declared that yes, the government had decided to devalue the currency. Naturally criticisms were voiced. To counter them the Prime Minister opened his briefcase, took out Neumark’s report, declared that an eminent university professor had expressed the view that it should be done and with that the administration had accepted view and devalued the lira.

Neumark's impact on Turkey's governance

Neumark’s greatest impact on the Turkish economy and functioning of the public sector was in the fields of budget, fiscal policy and especially taxation. His efforts were aimed at modernizing, rationalizing the taxation system and undertaking a fundamental and comprehensive fiscal reform. Having resided in Istanbul for several years, having visited several regions of the country, and having obtained first hand knowledge of the workings of the country’s public administration and parliament, he realized the great difficulties that would be encountered in adopting western financial institutions and procedures. For, despite the efforts made, fiscal administration was inefficient and the tax system was antiquated. Hence public services could not be financed in a fair and non-inflationary way.

But before any drastic steps could be taken in this direction the public expenditures caused by WWII had to be financed. Though Turkey was not actively involved in the war, its neutrality required maintaining large military forces. Tax revenues were insufficient to meet the rising defense expenditures which were being financed by short-term credit and the printing of money, hence, the high rate of inflation during those years. Under these circumstances the government enacted the varlık vergisi (real wealth tax) in December 1942. Neumark was of the opinion that it should be a one-year tax, which it turned out to be.

The wealth tax

The need for such a tax was recognized by some business people in principle. However, Neumark was very critical of the nature of the tax and the way it was levied. The tax had no rates. The fiscal administration did not have the ability to collect it in an equitable way, for there was no property tax and not even a modern income tax that would have provided the information on which to base a one-time real wealth tax. The amount to be paid was not determined according to the principle of the taxpayer’s ability to pay. The payments were lump sum and their amount was differentiated among the taxpayers in an unfair, unjust and arbitrary way taking into account in which minority group (Greek, Armenian, Jewish, or was a foreigner) the taxpayer belonged or if he was a Moslem Turk. Even in this latter case discriminations abounded. Many minorities had to pay a tax amount, which exceeded their wealth. Therefore they either borrowed money, went bankrupt or were sent to (Aşkale) a forced labor internment camp with very primitive conditions in the interior of the country. They were paid a very low wage, part of which was withheld to meet their tax bill. It would have taken scores of years for these withholdings to pay off the tax assessments of ten thousands or hundred thousands of liras had not the tax debts been erased in 1943 when the tax was repealed. Evasion was rampant, so those taxpayers who evaded payment ended up gaining while honest people were made into fools with the repeal of the tax whose yield was a little over TL 300 million, one-third of the government’s total revenue in 1941. It can be said that the objective of the tax was realized: to tax minorities and the citizens of other countries who conducted business in Turkey. Unfortunately, Neumark’s harsh criticism of the way the tax was implemented, criticism that he made to the highest authorities, fell onto deaf ears and those in the government who somehow where influenced by the Nazi ideology pretended not to hear it. In later years the same criticism was made by a number of professionals, including economists such as Fail Ökte who actually implemented the tax; but the damage had been done.

Neumark and Turkey's current tax system

Neumark’s greatest impact in the field of taxation in Turkey began in the late forties and ended with the tax reform legislation of 1950, which, after several amendments and changes over half a century, constitutes the basis of the current tax system. The tax reform act of 1950 can be conceived as the pinnacle of his life and work in Turkey. As mentioned earlier, Turkey’s tax system was antiquated. It was dominated by indirect taxes and especially by the turnover tax. A land tax was levied which did not provide much revenue. There was no property tax to speak of and the inheritance tax was insignificant. There was an income tax, which was not global but levied on individual sources of revenue in different ways. Wages and salaries were levied at progressive rates with some exemptions, while businesses were hardly paying taxes. A republic since 1923, Turkey underwent a stream of modifications to overcome the antiquated and inequitable tax system she inherited from the Ottomans. The piecemeal remedial changes and ad hoc amendments between 1926 and 1946 did not solve the budgetary problems and met the development requirements. A great deal more reform had to come starting with the income tax.

In this context Neumark raised and answered the following set of significant questions: (1) Could a modern income tax be implemented in a country where agriculture and artisans and handcrafts constituted a great portion of the sources of income? (2) Could the principles of a modern income tax be made consistent with the circumstances and conditions of the Turkish society? (3) What would be the trade-off between efficiency and equity; in other words, given the circumstances, could a modern income tax yield sufficient revenue to meet the development requirements and be equitable at the same time? (4) How to change the tax administration to conform to the new tasks arising from a tax reform?

Neumark was not alone in promulgating the need for a tax reform. There were also Turkish finance specialists who saw this need. Ali Alaybek, who was familiar with European financial institutions, was one of them. After numerous discussions with high government echelons, he and Neumark succeeded in persuading the finance minister Nurullah Esat Sümer, and through him the entire cabinet, of the necessity of creating a small commission to investigate and discuss tax reform. The intensive work of the commission, in which the Chief of the Tax Office of Istanbul, Mehmet İzmen, also participated, continued for years. The goal issue was to create with a new tax system that would broaden the base by bringing businesses that were rarely paying taxes into the income tax net, while reducing the tax burden of the workers and employees. The commission, which included several other experts, recommended establishment of a German-based tax system that introduced a global income tax on personal incomes and corporations, yet levied small businesses and artisans with a different tax, for they could not be expected to be integrated effectively into a modern tax system which required book-keeping. The report also proposed that the inheritance tax be progressive, not only to increase revenue, but for social purposes as well.

Fueled primarily by those whose tax burden would be increased, a fierce public debate emerged when the report, and especially the tax legislation projects were made public by the Ministry of Finance. The discussions by the general press in professional publications, radio programs and chambers of commerce and industry became the order of the day and continued for a whole year. During those days Neumark’s public fame and popularity oscillated between pro and con. Among his students, however, the respect he commanded was unquestionable and unwavering. Neumark was also very active in organizing and participating in Turkey’s Second Economic Congress in 1948 where all sectors were present –private, public and academic – and where all tax issues were debated.

The proposals of the report became law in 1950. The tax legislation enacted (with all its amendments and alterations) is the basis of the tax system that exists today. Turkey’s tax reform is the first to be initiated in a developing country after WWII. Fritz Neumark was involved with reform efforts from its very inception. He had submitted several reports to high government officials on the need for reform, had participated in endless committee meetings at the ministerial level and had written several articles in scientific journals and newspaper to educate and inform the public.

Neumark as educator

Neumark contributed greatly to the education of young Turkish economists who themselves contributed to teaching modern economics and became holders of public offices. For example, Refii Şükrü Suvla (his docent ) over many years advised the Central Bank and other state banks; Muhlis Ete (docent) became Minister of Commerce; Osman Okyar (assistant) taught at Middle Eastern Technical University and subsequently became the Chancellor of the University of Erzurum; Memduh Yaşa (docent) succeeded Neumark as the director of the Public Finance Institute at the University of Istanbul and advised Prime Minister Adnan Menderes; many other of his docents and assistants became well-known professors of economics and of public finance.

Return to Germany

The year that the old income tax was abolished also turned out to be the year when Neumark, the architect of the new one, began deliberating about his future. His ultimate decision to return to his native land generated a loss for his foster home.

Following the war Neumark renewed contacts in the international economics community and served as a consultant to the Allies on planning the reconstruction and de-Nazification of Germany’s system of higher education. He served for years as an advisor to the German government. He was the Chairman of the Scientific Commission of the Ministry of Finance for ten years. He also served on the Scientific Commission of the Ministry of Economic Affairs and worked for the Organization of Economic Cooperation and Development. In 1960 he led a Tax Commission of the European Economic Community that developed the tax policy of the Common Market. The “Neumark Report,” to which it was constantly referred was submitted in 1962. It gave birth to the value-added tax which is currently levied in European Economic Union member states. He was awarded honorary doctorates in several German universities and was named honorary president of the International Institute of Public Finance and International Economic Association. He was often consulted regarding the German-Turkish relationship.

Epilogue

Fritz Neumark never stopped expressing his loyalty and gratitude to Turkey and in 1986 he traveled to Turkey with President Richard von Weizsäcker who placed a plaque at the University of Istanbul. Germany acknowledged its gratitude to Turkey for having granted refuge to the German professors in her academic institutions.

Notes

This article is based on Andic, F and Reisman, A. (2007) “Migration and transfer of knowledge: Refugees from nazism and Turkish legal reform.” Forum historiae iuris. http://www.forhistiur.de/zitat/0707andic_reisman.htm Also http://www.rewi.hu-berlin.de/online/fhi/articles/pdf-files/0707andic_reisman.pdf Also available on SSRN at http://ssrn.com/abstract=994643

For additional reading on Fritz Neumark’s Turkish exile see Arnold Reisman TURKEY'S MODERNIZATION: Refugees from Nazism and Ataturk's Vision 2006 http://www.newacademia.com/turkeys_modernization/

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