Tax Related Strength and Inflation: Seriously…
Countries are like big companies. They all are
ruled by governments which base their existence to law, order and politics. Governments
can be described as board of directors. They are the decision makers and affect
all the citizens of the countries they govern. These big companies also have
their income and expenditure items like private or public-sector enterprises. Most
of their income is generated by taxes which they spend for their investments,
services they are providing externally. We categorize all their spending in
public expenditure items which is a part of GDP by expenditure.
In the table below, we can see some countries
getting their places in country rankings. According to IMF WEO data US is the
strongest among other ones. We must try to approach those figures from
different angle. How do they reach these GDP levels, that’s the tricky question
hiding behind numbers?
The citizens which leave in those countries are
worthy of their incomes. And for that we have GDP per capita data. It is not a
sign of wealth how big a country is. But GDP per capita on the other hand indicates
the wealth of citizens of a specific country. Comparing the two tables we can
argue that US is the biggest country among those which are subjected to created
list. However, that does not solely mean that citizens are the wealthiest too. For
the same countries the highest GDP per capita rate belongs to Switzerland with almost
81k USD. Does that mean that Switzerland is the most effective country among
them? This will be the focus of another writing of mine.
Coming back to governments and how much their
income is, can be measured as a percentage of GDP. In Switzerland the general
government revenue is corresponding to 33.5% of the GDP which is 228 billion of
USD. This percentage for Turkey is 30.8% of total GDP (~259 bn USD). This could
be the consequence of higher GDP causing also higher government revenue.
It is clear for Turkey that governments contribution
to GDP was 14.8% in 2016. This is 4 times smaller than expenditure of “Resident
households and non-profit institutions serving households”. As I mentioned
before, the consumption expenditure by government is mostly generated by taxes,
which is used to public investments, wage payments, external service payments,
etc.
In 2017 Central Governments’ Revenues are totaling
of 630 bn TL, of which 536 bn TL are tax income (85% of total revenue). In 2006
the same ratio was 79.2% and hit its record in 2011 with 85.5%. They are very
closely correlated, too.
Taxes hinge upon 3 important trivets: Taxes on
Income and Earnings, Domestic Tax on Goods and Services and Taxes on
International Trades and Transactions. Distribution of different type of taxes
Turkish Government collects are shown in the table below.
Until now I didn’t mention about inflation. In
my opinion inflation is affected by taxes. Hikes in tax rates are affecting
households and their consumption very closely. Since November 2016 year on year
inflation trend is almost always upwards. Only exceptions are recorded in 4 months
period. Inflation with 2 figures are not a good sign for an economy. It weakens
CBRT’s hand for a future rate hike if needed, because our inflation level is
already high and higher rates mean much higher inflation compared to current
situation. This could leave our citizens defenseless and TL worthless.
Again, I am coming to taxes: We can also separate
taxes into 2 main groups, direct and indirect. Direct taxes incorporate the
taxes that can't be transferred or shifted to someone else, for example the
income tax an individual pay directly to the government. Indirect taxes, on the
other hand, are charges which can be moved to someone else. An example would be
the Value Added Tax (VAT) that is included in the bill of products and services
that you secure from others.
Interesting thing is that the amount of
indirect taxes is always higher than direct taxes from 2006 till today. This
could be an indication of not successfully collecting direct taxes which could
be a better approach if government can collect tax from the source. This brings
us to the result that we have a 96.7% correlation between CPI monthly index and
monthly indirect tax revenue (mn TL). This could be an early warning for government
which tries to reduce inflation level to one-digit figures.
