The Impact of Direct and Indirect Taxes on the Growth of the Turkish Economy

The impact of direct and indirect taxes on the growth of the Turkish economy

SUNA KORKMAZ, Ph.D.* METEHAN YILGOR, Ph.D.* FADIME AKSOY, Ph.D. candidate*

Preliminary communication ** JEL: C22, E62, O47 https://doi.org/10.3326/pse.43.3.5

* The authors would like to thank to the two anonymous referees for helpful comments on the paper. ** Received: July 9, 2019 Accepted: July 31, 2019

Suna KORKMAZ Bandırma Onyedi Eylul University, Department of Economics, 10200 Bandırma, Turkey e-mail: [email protected] ORCiD: 0000-0001-6221-2322

Metehan YILGOR Bandırma Onyedi Eylul University, Department of Econometrics, 10200 Bandırma, Turkey e-mail: [email protected] ORCiD: 0000-0001-6921-6684

Fadime AKSOY Bandırma Onyedi Eylul University, Department of Econometrics, 10200 Bandırma, Turkey e-mail: [email protected] ORCiD: 0000-0003-0211-8304 - Eco- nomic doctrines supporting government intervention in the economy have brought have economy the in intervention government supporting doctrines nomic emphasis forward recommendations on the taxation policies of the state. Keynes’s was on the potential for government spending and taxation to influence aggregate demand. Keynes says that changes in government spending or taxation are multi- plied in their effect on the economy. The key element in this multiplier effect govern- isthat declared Keynes incomes. their in changes to respond consumers how ments should increase spending and cut taxes to boost their economies (Nelson, 2006:2). The supply-side economist Arthur Laffer stated that an increase in tax rates lowers or only causes a small increase in tax revenue because people avoid taxation, which lowers the tax base that tax rates should be lowered to increase economic production. strongly argue (Kazman, 2014). Supply-side economists The taxation system currently in force in Turkey is a multiple tax system, taxes being classified as either direct or indirect. The distinction tax- initial the from shifted be can burden their betweenwhether on based is taxes indirect direct and where payer the to burden others. Taxes can be shifted to others are indirect, and tax- the If direct. are person other any to shifted be cannot burden the where taxes able event is of a continuous nature, then the consequent taxes are classified as direct. If the taxable event arises occasionally and is not of a continuous nature, Governments can implement tax policies as a fiscal implemented be to policies Tax policy investments. their finance and expenditures certain instrument to make policies may help individual gov- Tax may objectives. vary depending on targeted ernments raise higher revenues with the aim of reducing the balance of payments or trade balance deficits, or encouraging growth financing public expenditures, and development by granting incentives. have Taxes always been a very popular subject of discussion in the literature on economics. the Moreover, tax rates to be topic. popular a been always have economy the on reflections their and levied 1 INTRODUCTION Abstract Governments able are to implement monetary and fiscal policies to achieve eco- - improv stability, price ensuring production, increasing as such objectives, nomic banks central While employment. full achieving and payments, of balance the ing Fis- policies. fiscal develop contrast, in governments, policies, monetary out carry cal policy instruments can include public taxes, expenditures, and In borrowing. countries that have low savings levels, individuals participate in public expendi part of their income. by spending a large tures taxes effectively are Therefore, used as a major policy instrument. The impact of by analyzed been has Turkey in growth economic on taxes indirect and direct both employing distributed the sug- results lag autoregressive (ARDL) Test approach. well as growth economic on taxes indirect of impact significant and positive a gest taxes. impact of direct as a negative and significant taxes, Turkey indirect growth, taxes, economic ARDL, direct Keywords:

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313 43 (3) 311-323 (2019) Reducing income tax in favor of raising value-added tax increases the tax burden and middle-class on those with lower- incomes. Raising indirect taxes curbs the overall demand for goods and services. Focusing on consumption encourages incomes who also those with upper-class consume little to evade taxes. Disadvantages – – – 1 Hypothesis 1: Direct taxes have negative effects on economic growth, - affect negatively. ing GDP Raising indirect taxes also raises capital accumulation in the long term. The return of value-added tax in export transactions has a positive impact on foreign trade. consumption rather than income Taxing in order not to alter total income encourages economic growth. Avoiding taxes on goods and services is taxes on goods and services Avoiding almost impossible. able Advantages – – – – Source: Özdemir (2009:17-18). Source: The relationship between economic growth and tax revenues is one of the most Although there are many variables that shape controversial areas in the literature. economic growth, tax has a much more pronounced effect on economic growth with its direct and indirect effects. Tax revenues are one of the most con- increased has revenues tax of amount The important economy. Turkish the of revenues of 24% reached revenues tax of amount the 2018, in and years, the over tinuously which aims to present study, the This has motivated product. national Turkish the Turkey. in growth economic and revenues tax between relationship the investigate on taxes indirect and taxes direct of impact the of analysis an involves study This The following research hypotheses are suggested. Turkey. economic growth in T taxes The advantages and disadvantages of indirect then the consequent taxes are classified as indirect (Erdem, Şenyüz and Tatlıoğlu, and Şenyüz (Erdem, indirect as classified are taxes consequent the then The 2012:113-115). tax bearer pays direct taxes to the government. The govern- other the on intermediary, An businesses. and people on taxes levies directly ment burden financial ultimate the bearing person the from taxes indirect collects hand, of the tax. Therefore, the taxpayer and the tax bearer are different in relation to these types of levied taxes. Taxes on revenues and wealth are classified as direct taxes, whereas taxes levied on expenditures on goods and services are classified as indirect taxes. levied Taxes on revenues comprise personal income taxes and comprise hand, other the on expenditures, on levied Taxes taxes. income corporate value-added taxes, excise duties, special communication taxes, gambling taxes, customs duties, banking and insurance taxes, stamp duties, fees levied on nego- tiable instruments, and other fees and charges. The vehicle motor comprise wealth on levied largest Taxes tax. value-added by taken is taxes share among these property taxes. taxes, estate taxes, and advan- The disadvantages. and advantages has taxes indirect to direct from shift A tages and disadvantages of indirect taxes are given in table 1 17-18). (Özdemir, 2009: - - affect growth, economic on effects positive have taxes Indirect 2: Hypothesis positively. ing GDP LITERATURE REVIEW REVIEW LITERATURE Anastassiou and Dritsaki (2005) noted a unidirectional causal relationship between relationship causal unidirectional a noted (2005) Dritsaki and Anastassiou total tax revenues and economic growth as a result of an analysis conducted on (2012) Dahlby and Ferede 2002. and 1965 between from Greece from data annual statutory provincial higher a that found 2006 to 1977 covering data panel using by corporate income tax rate was associated slower with economic growth. Stoilova lower and Patonov (2012) private using data from investment 1995 to and 2010 examined the major tendencies in 27 European Union member countries in the distribution of the total tax burden. The study found that direct taxes had a more efficient impact on economic growth. Muriithi (2013) found that in Kenya, an increase in value-added tax rates had a positive impact on economic growth between 1992 and 2011. Kesavarajah (2014) noted a unidirectional causal rela The remaining part of this study is organized as follows: related studies. The data section and estimation methodology employed 2 are discussed in overviews section 3. Section 4 describes the empirical findings, and finally we present our conclusions. 2 tionship from income taxes, value-added taxes, and international taxes toward economic growth as a result of an analysis conducted on Sri Lankan annual data from between 1980 and 2013. Dehghan and Nonejad (2015) used the least squares approach to analyze annual data from Iran from between 1981 and 2010. The results of their analyses suggest a negative impact of corporate taxes, business taxes, general of impact positive and a noted (2015) indirect Shinwari and Azam taxes Iqbal, growth. nomic on eco- taxation excluding wealth workers’ tax on economic growth upon examining sta- tistical data for Pakistan between 1979 and 2010. In studying Africa, South Phiri (2016) noted that the optimal tax rate was 10.27% according to an STR analysis conducted using time series data collected from 1990:Q1 taxes to were 2015:Q2. positively Indirect related to economic growth, while direct affected growth taxes below this adversely threshold. Etale and Bingilar (2016) noted that company income tax and value-added tax (2016) Ahmad had and a Sial Ahmad, significant2005-2014. period the positivefor Nigeria in growth impactnomic on eco- applied ARDL the approach to annual data for the period 1974-2010 in Pakistan. The results of the research study suggest that indirect taxes should be reduced and direct taxes should be incremented to increase economic growth. significant a had revenues tax that proved (2017) Oyeyemi and Ibukun Babatunde, 2013. and 2004 between Africa throughout growth economic on influence positive noted (2017) Grofelnik and Žmuk Palić, 2016, to 2000 from Croatia examining In that personal income taxation had a significantgrowth. negative Geetanjali (2017) and Venugopal used impactthe OLS approach for the period on economic

public sector suna korkmaz, metehan yilgor, fadime aksoy: economics the impact of direct and indirect taxes on the growth of the turkish economy 43 (3) 311-323 (2019) 314 public sector suna korkmaz, metehan yilgor, fadime aksoy: economics the impact of direct and indirect taxes on the growth of the turkish economy

315 43 (3) 311-323 (2019) 1 - - a

(1) quarter 2018 data th

is the constant term, constant the is 0 a is the classical error term. All term. error classical the is t e is the cointegrating vector to be estimated, and estimated, be to vector cointegrating the is 2 a , 3 DATA AND METHODOLOGY 3 DATA growth economic on taxes direct and indirect of effect the investigates study This in Turkey using the ARDL model. To calculate this relationship, quarterly data were used. Since the 4 series for the period 2006:Q1-2018:Q3 2000-2016 2000-2016 for India. The researchers concluded that there is a significant impact of direct taxes on economic growth. Kalaš, Andrašić Mirović (2017) and studied American data from 1996 to 2016 and demonstrated that an increase in tax reve- growth, economic on effect significant a had contributions security social and nues while personal income tax and corporate income tax did not tax have that reveal to approach OLS the a used (2017) Amegnaglo significant and Nonvide impact. economic growth. Egbunike, Emudain revenues had on a Benin’s positive effect ohwo and Gunardi (2018) examined the economies of Nigeria and Ghana between Ghana and Nigeria of economies the examined (2018) Gunardi and ohwo 2000 and 2016 and showed that tax revenues had et a positive effect Mdanat on economic 2015, to 1980 from data for model correction error an Using growth. that consumption and demonstrated tariffs (2018) al. had a positive effect on - nega taxes income whereas growth, (GDP) product domestic gross capita per growth measure in Jordan. tively influenced this have not yet been published, we were unable to use them. All the data used in this in used data the All them. use to unable were we published, been yet not have study were collected from the Central Bank of the Republic of Turkey (EVDS, 2019). The GDP variable was seasonally adjusted and estimated logarithm natural a into converted were variables these All based approach. expenditure on the for consistent and reliable empirical results (Shahbaz et al., 2016). For empirical follows: estimation, the model was established as variables are expressed in thousand TL. The data description for depicted the in table model 2, where is mean, median, minimum, maximum, standard devia tion, skewness, kurtosis, and Jarque-Bera test values show their properties. The not does dataset the that suggest 2 table in portrayed values kurtosis and skewness have any skewed value problems or complications. The insignificant, which proves that all the variables are normally distributed. Jarque-Bera value is perform- to prior variables the of conditions stationary the check to imperative is It ing a time series analysis to avoid the spurious regression problem (Newbold and using variables all of condition stationary the examined we Hence, 1974). Granger, 1988) tests. 1979) and Phillips-Perron (PP, the augmented Dickey-Fuller (ADF, In this equation, GDP, In referred this to equation, as GDP, economic growth, is the dependent variable taxes, direct is LDT taxes, indirect is LIT model, the of I(0) LDT 0.4942 0.1649 1.9648 2.5577* 15.4622 15.4209 16.5224 14.5990 PP -1.444 (-4.152) -7.504 (-4.156)* -4.245 (-4.148)* -5.996 (-4.148)* LIT 0.4677 0.0344 1.7247 1.7247* 16.5633 16.5482 17.3774 15.8865 ADF ADF -2.032 (-4.148) -6.963 (-4.152)* -4.349 (-4.148)* -5.790 (-4.152)* 0.1154 0.2010 1.5702 4.5444* LGDP 19.5805 19.5677 19.9026 19.2969 , the results directed us to opt for the ARDL bound test bound ARDL the for opt to us directed results the I(1), 3 2 indicates a significance level of 5%. indicates a significance indicates a significance level of 1%. Figures in parentheses are critical values of test sta- test of values critical are parentheses in Figures 1%. of level significance a indicates * * able able LGDP Variable Descriptive Descriptive statistics ∆LGDP LIT LDT Mean Median Maximum Minimum Standard deviation Skewness Kurtosis Jarque–Bera tistics. Schwarz information criterion is used. The change in economic growth was modeled as a function of the lag of variables variables of lag the of function a as modeled was growth economic in change The a with model correction error unrestricted an is This taxes. direct and indirect and deterministic trend, whereby the ϕ, δ, and ϒ coefficients represent the short-term Note: T results test Unit root 4 FINDINGS determine the To stationarity of the data, we ADF applied and unit PP root tests, and the results of both tests are presented As in a table few 3. variables were were remaining the and was variable GDP the that revealed tests both of results The 2001). al., et (Pesaran difference stationary, whereas the variables and indirect and direct taxes trend stationary. were According to the econometric methodology, based on stationarity criteria, long-term association the between two or more variables is calculated through the ARDL approach, ARDL bound-testing The approach, as recommended by Pesa- and long- the establish to used was (2001), al. et Peseran and (1999) Shin and ran The growth. economic and taxes direct and indirect between dynamics short-term ARDL bound-testing approach was preferred over other econometric techniques because 1990) Juselius, and Johansen and 1987; Granger, and Engle of those (e.g. it degrees permits [I(0), variables I(1)] to and be regressors stationary at different cointegration to the traditional according lag lengths optimal to have different Giles, 2013). procedure (Pesaran, Shin and Smith, 2001; Note: T statistics Descriptive

public sector suna korkmaz, metehan yilgor, fadime aksoy: economics the impact of direct and indirect taxes on the growth of the turkish economy 43 (3) 311-323 (2019) 316 public sector suna korkmaz, metehan yilgor, fadime aksoy: economics the impact of direct and indirect taxes on the growth of the turkish economy

317 43 (3) 311-323 (2019) - (2)

5.35 (10%) 6.30 (5%) 8.72 (1%) 0.0276 0.0035 0.0000 0.7232 0.0019 0.0196 0.5582 0.6549

0.0027 p-value

cointegration Upper Upper bound 4.38 5.24 7.33 Lower bound Lower 2.2880 3.1087 6.1999 2.4336 0.5906 -3.3311 -0.3567 -0.4504 -3.2102 t-statistics 14.16 F-statistics (There is cointegration in these series) (There is cointegration (There is no cointegration in these series) (There is no cointegration 0.1166 0.3035 0.4419 0.2795 0.0872 -0.0530 -0.6772 -0.0892 -0.0064 Coefficients (4,1,0) Optimal lag SA(-4) -- 5 4 able able LGDP_SA(-1) LGDP=f (LIT, LDT) LGDP=f (LIT, Exists Variables Estimated model LIT_SA LGDP_SA(-2) LIT_SA(-1) LGDP_SA(-3) C LDT_SA LGDP @TREND ARDL long-term estimation results long-term estimation results ARDL T The results of the long-term estimation found under ARDL model the framework are presented in table The 5. test results indicate that a 1% increase in direct taxes leads to an 8% decrease in economic growth. a Similarly, 1% increase in indirect The bold). in 5 table in (shown growth economic in increment 27% a to leads taxes whereas the trend variable is significant. fixed variate is statistically insignificant, T cointegration results bound-testing ARDL relationship and the α coefficient represents the long-term relationship. The unre- and the α relationship long-term relationship. represents the coefficient follows: was established as correction model stricted error Each hypothesis was tested using an F test. The optimal lag length of the model was calculated as (4,1,0) by AIC considering information the criterion, as shown in table 4. The F-statistics value (14.16) calculated at the 1% significance level was higher than the upper-bound critical value (8.72) at the 5% level of significance. This indicates the existence of a cointegration relationship between Tur economic growth. indirect and direct taxes and its key’s The hypotheses used to test the existence of cointegration between the variables follows: in the model are as 0.0051 0.0348 0.0000 p-value 0.8077 0.4796 p-value 2.9701 -2.1865 -6.6839 t-statistics 0.581 0.2147 F-statistics 1.7983 -0.4052 -0.2203 Coefficients Test 7 6 able able Breusch-Godfrey LM test White test Variables LIT_SA LDT_SA CointEq(-1)* EC = LGDP_SA - (1.7983*LIT_SA -0.4053*LDT_SA) - (1.7983*LIT_SA EC = LGDP_SA Diagnostic test results Furthermore, we also found the model to be stable as shown in figure 1. The stability of the regression coefficients was(CUSUM) evaluated and using the cumulative cumulative the sum sum of regres- The squares 1975). Evans, and Durbin (Brown, stability structural for test residual (CUSUMSQ) of the recursive sion equation appears stable, given that neither the CUSUM nor the CUSUMSQ 5% level of significance. test statistics exceed the bounds of the Plots of each test (figure 1) were generated based on ARDL estimates the of our model. The values of residuals are shown in straight lines and their confidence levels are shown All in residual dashed values lines are on within the con- graph. model. ARDL fidence lines, thus suggesting the consistency of our T We also We checked serial correlation using the Breusch-Godfrey serial correlation of results test diagnostic The test. White the using heteroskedasticity and test LM the model are presented in table 7. The Breusch-Godfrey LM test detect to indicated used is which test, White no the of results The model. the in autocorrelation indicated no heteroskedasticity. the presence of heteroskedasticity, T (short-term estimation) estimates approach correction error ARDL Table Table 6 lists the results of the estimation found by using error CointEq correction. (-1) The coefficient is the long-term equilibrium speed of adjustment. This any of 22% that means This level. 1% the at negative and significant is coefficient disequilibrium occurring in the previous quarter is corrected in the next The one. variables, indirect taxes, and direct taxes are statistically significant. This means impact an term, short the in have, taxes direct and taxes, indirect variables, the that increase an that indicates taxes indirect short-term of coefficient The GDP. the on in indirect taxes has a positive impact on economic growth. Direct taxes, on the impact on economic growth. other hand, have a negative

public sector suna korkmaz, metehan yilgor, fadime aksoy: economics the impact of direct and indirect taxes on the growth of the turkish economy 43 (3) 311-323 (2019) 318 public sector suna korkmaz, metehan yilgor, fadime aksoy: economics the impact of direct and indirect taxes on the growth of the turkish economy

319 43 (3) 311-323 (2019) - - - - 1 2 7 1 2 6 1 5 significance 2 5 1 2 4 1 2 3 1 2 2 CUSUM of squares 1 2 1 1 2 2 4 4 2 6 4 2 1 1 1 - - 1 2 7 1 2 6 1 2 5 5 significance 1 2 4 1 2 3 1 CUSUM 2 2 1 1 2 1 1 2 igure 2 6 6 2 4 4 - - 1 1 1 1 tion policies which are developed to regulate the allocation of resources, support inequality palliate inflation, control incentives, through investments sector private between income and wealth, and create resources increase or decrease in the tax rates will significantlyaffect economic for indicators. the public sector. Any In taxes Turkey, are either direct or indirect. An increase in direct tax rates will reduce disposable personal income, therefore lowering the overall demand for goods and services which in turn adversely decrease affects economic A growth. tax indirect reduce consequently will services and goods for demand overall the in revenues. The resulting reduction in the level of overall expenditures on goods and services will thus lead to a decrease in value-added tax revenues, which ulti tax in increase an Although taxes. indirect of portion largest the comprises mately rates will slow economic growth, it might contribute positively to the solution to another economic problem. An increase in tax rates would demand for goods reduce and services, and result in a the decrease in demand-pull inflation overall in countries struggling with inflation. This study was motivated by the need for an empirical analysis of the impact of tax rises on the growth of tax revenues which is an important resource for Tur cointe to approach testing bounds the used have we study this In economy. key’s gration (developed within an autoregressive distributed lag framework) to - inves tigate whether there is a long-run equilibrium relationship growth, between direct economic taxes, and indirect taxes for the results of the period findings of this study ultimately suggest 2006:Q1-2018:Q3. there is a positive and sig- The nificant impact of indirect taxes oneconomic growth, and a negative and significant impact of direct taxes both in the short run and the long run. CUSUM and CUSUMQ tests indicate that the model is structurally stable. Personal and 4 CONCLUSIONS Governments collect taxes to fulfill certain public services; tax revenues are used to finance education and health care expenditures as well as public investments. Developing countries use taxes for various purposes. They likewise create taxa - - F (CUSUMSQ) sum of squares and cumulative sum (CUSUM) Plots of cumulative Disclosure statement Disclosure No potential conflict of interest was reported by the authors. corporate income taxes collected from Turkish taxpayers affect economic growth taxpayers affect Turkish corporate income taxes collected from given adversely, that they disposable reduce personal individuals’ income. - How ever, value-added taxes and excise duties, both of which count as indirect taxes, revenues of the state. by increasing the growth positively economic affect stud- in as literature, the in published others to different strikingly are findings Our ies by Stoilova and Patonov (2012), Dehghan and Nonejad (2015), and Ahmad, Ahmad (2016). Our findings are similar to those of studies conducted by Sial and Muriithi (2013), Phiri (2016), Palić, Žmuk and Grofelnik (2017), and Mdanat et out- dramatically Turkey in implemented taxes indirect of number The (2018). al. our support to seems this implemented; are that taxes direct of number the weighs Accord- growth. on impact positive a have taxes indirect words, other In findings. we can conclude that ingly, growth occurs through largely public investments. In contrast, we found that, over the long between run, direct there taxes was and a growth. negative Corporate relationship and classed income as direct taxes, have taxes, a negative impact in which that they allow firms and can indi- be viduals alike to save money and, consequently, also have a negative impact on private investments. Furthermore, we believe that shifting the composition of tax revenues from direct to indirect tax items will in turn significantly decrease the growth. negative impact that direct taxes have on our at data of lack a to Due set. data the of size the of terms in limited is study Our 2006:Q1 and 2018:Q3. disposal, we opted to use the period between What we in turn recommend is for the tax burden to be included as a variable in any future study looking at the impact of tax revenues on economic This growth. requires manner balanced and fair a in burden tax the because sharing is important one to first compare and contrast what share ofthe taxeshigh, extraordinarily areis directTurkey in versustaxes indirect to indirect. direct of ratio the that Given puts turn in This reduced. is save can firms and individuals that money of amount a strain on the demand for goods and services. The only solution therefore is for are of the opinion that not only will reduc- We the government to lower tax rates. will it equity, tax of achievement the to contribute rates tax direct and indirect ing economic growth. also have a parallel positive impact on

public sector suna korkmaz, metehan yilgor, fadime aksoy: economics the impact of direct and indirect taxes on the growth of the turkish economy 43 (3) 311-323 (2019) 320 public sector suna korkmaz, metehan yilgor, fadime aksoy: economics the impact of direct and indirect taxes on the growth of the turkish economy

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