Tax Related Strength and Inflation: Seriously...

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.