Nominal and real fiscal drag effect: The case of Türkiye

In this study, which analyses the effects of inflation and growth being among macroeconomic indicators, on income tax revenues fort he period 1960-2022, firstly, the effect of inflation on tax revenues is examined in both directions, namely individuals within the framework of nominal fiscal drag and the public sector within the scope of Olivera-Tanzi effect. The effect of growth on tax revenues is also discussed at the conceptual level in the perspective of real fiscal drag and tax buoyancy for both sides. In this framework, the relationship between inflation-tax revenues and growth-tax revenues has been analysed by Kalman filtering, whis is a dynamic time-varying parameter method applied to the model within the scope of the established state-space model. The regreression model developed by Bai and Perron (1998), Bai and Perron (2003a) and Bai and Perron (2003b) is used to examine whether the results obtained with the filtered state-space model fort he relevant period contain a break point by being affected by the changes that ocur during the period. The findings of the empirical analyses indicate that nominal and real fiscal drag is effective in Türkiye for the period covering 1960-2022. The fiscal drag effects in question have been increasing in intensity especially since the 1970s. It is concluded that the fiscal drag phenomenon, which was effective at the highest level in the 1980s, maintaned a more stable course in the years following 2000 compared to the previous periods, on the other hands sustained its rigidity until the end of the period.