The effects of direct and indirect taxes on inflation and economic growth:in Turkey

Taxes are one of the most important sources of income for countries. Countries use taxes to finance public expenditures. Taxes are divided into direct and indirect taxes according to their types. Indirect taxes include taxes whose payment can be reflected. Indirect taxes consist of taxes on the goods and services sector, stamp duty, taxes on international trade and transactions, and charges. If indirect taxes are explained in their simplest form, they are taxes such as VAT (Value Added Tax), SCT (Special Consumption Tax), and tariff. On the other hand, direct taxes are considered as non-reflective taxes. In direct taxes, there are Income tax, Corporation tax, and taxes on wealth. Wealth taxes include taxes such as Motor Vehicles Tax and Real Estate Tax. In recent years, Valuable Housing Tax has been added to the Real Estate tax, which is included in the wealth tax, by being published in the official gazette. It is obvious that countries have difficulties in collecting taxes. The presence of individuals who do not pay direct taxes and do tax evasion leads countries to indirect taxes. Particularly, developing countries focus on indirect taxes. Turkey gives more importance to indirect tax revenues, because it is a developing country. Indirect taxes are easier to collect than direct taxes. This situation is important in terms of the income of countries. Inflation refers to the increase in the general level of prices. An increase in inflation creates positive or negative results according to situation in the country. In inflationary periods, countries use tax policies, which are a fiscal policy tool, to find against inflation. Economic growth is the most important phenomenon for countries. Especially in developing countries, this phenomenon is desired to be stable. Countries that achieve their economic growth are known as developed countries, which are self-sufficient and not dependent on the other countries. The developing Turkish economy also benefits from production, consumption and tax revenues to provide economic growth. When there is an increase or decrease in taxes, there is a change in the income of the country, and this is reflected in economic growth. The aim of this study is to examine how indirect and direct taxes affect inflation and economic growth of Turkish economy. Since this study includes two separate subjects, data from different times were used when selecting data. In the analysis, the data for indirect taxes, direct taxes and inflation were made by considering 2006M2-2021M11 monthly. In the analysis made for direct taxes, indirect taxes and economic growth, the data include the periods 2006Q2-2021Q3. The method used in the analysis part is the time series method. There are two models in this study. Model 1 is established to see how indirect and direct taxes affect inflation, and model 2 is established to see how indirect taxes and direct taxes affect economic growth. In the time series analysis, firstly, the stationarity of the variables was tested with unit root tests. Then, vector autoregressive model (VAR) was created for the models. VAR Granger Causality Test was applied with this created VAR model. For Model 1, causality from direct taxes to inflation has been determined. For Model 2, causality from direct taxes to economic growth and bidirectional causality between indirect taxes and economic growth has been determined. Keywords: Direct Taxes, Indirect Taxes, Inflation, Economic Growth