Relative contributions of indirect taxes and inflation on inequality: What does the Turkish data reveal?

• Published date: 01 February 2024
• Author: Selçuk Gemicioğlu,Burça Kızılırmak,Uğur Akkoç
• Date: 01 February 2024
• DOI: http://doi.org/10.1111/rode.13055

REGULAR ARTICLE

Relative contributions of indirect taxes and

inflation on inequality: What does the Turkish

data reveal?

Selçuk Gemicio

glu

1

|Burça Kızılırmak

2

|U



gur Akkoç

3

1

Van Yüzüncü Yıl University, FEAS,

Van, Turkey

2

Ankara University, Faculty of Political

Sciences, Ankara, Turkey

3

Pamukkale University, FEAS,

Denizli, Turkey

Correspondence

U

gur Akkoç, Pamukkale University,

FEAS, Denizli, Turkey.

Email: uakkoc@pau.edu.tr

Funding information

Türkiye Bilimsel ve Teknolojik Ara¸stırma

Kurumu, Grant/Award Number: 120K149

Abstract

One way inflation affects consumption inequality is

through its varying impact on the purchasing power of dif-

ferent households. Indirect taxes, which affect commodity

price levels, are another effective factor influencing con-

sumption inequality. Turkey is a highly unequal country

with a long history of high inflation. Moreover, indirect

taxes have been used frequently as a policy tool in the last

decades. This study develops a novel approach to examin-

ing the relative contributions of household inflation rates

and indirect tax changes to real consumption inequality

and applies it to the case of Turkey. The analysis is carried

out using both household-level data and artificial panel

data created to apply the Shapley and Owen decomposi-

tion methods. The findings roughly can be summarized in

two points. First, while nominal consumption during the

2003–2019 period became more equal, real consumption

inequality increased as a result of price changes during

that time. Variations in household inflation rates are the

primary source of increased inequality. Second, changes in

indirect taxes account for 31% to 68% of the unequalizing

effect of price changes, depending on the method used.

Results imply that monetary and indirect tax policy mix

have been in favor of the rich in this period.

KEYWORDS

consumption inequality, decomposition methods, Gini index,

household budget surveys, household level inflation rates,

unconventional fiscal policy

Received: 15 January 2023Revised: 8 August 2023Accepted: 14 September 2023

DOI: 10.1111/rode.13055

286 © 2023 John Wiley & Sons Ltd.Rev Dev Econ. 2024;28:286–309.wileyonlinelibrary.com/journal/rode

JEL CLASSIFICATION

C83, D31, E31, E62, H31, I31

1|INTRODUCTION

Inflation is a major concern for nations with its numerous economic and social consequences,

including consumption inequality. One channel that inflation affects inequality is through its

varying impact on the purchasing power of different households based on their spending pat-

terns. Thus, identifying the role of differing price changes across commodities is important in

understanding consumption inequality. Indirect taxes, which also determine commodity price

levels, are another effective factor in this channel. The purpose of this study is to examine the

effects of household-level inflation and indirect tax changes on changes in real consumption

inequality in Turkey from 2003 to 2019.

Turkey is a highly unequal country. Data from the World Bank indicate that Turkey's

income Gini index is 41 in 2020, compared to an average of 34 in OECD countries. Inequality

has also generally been on the rise since the 2008 financial crisis. Turkey also had historically

high inflation rates. The average inflation rate was 9.4% in the 2003–2019 period, which is much

higher than the OECD average of 2.1% in the same period. Furthermore, inflation reached

record highs in the years that followed 2019.

1

Another striking feature of the Turkish economy is the importance of indirect taxes. Indirect

tax revenues accounted for 65% of the general budget in 2021 (TCMB, 2022). According to

Akkoç et al. (2023), households must allocate, on average, between 15.1% and 18.6% of their

budget to pay these taxes. Moreover, indirect taxes have been used frequently as a policy tool.

Over the study period, the VAT legislation was revised 58 times, with 40 of those changes relat-

ing to VAT rates. 130 changes were made to the excise tax law during the same time period.

The lump sum excise taxes were adjusted every 6 months, sometimes in line with inflation and

sometimes independently. Exemptions enacted in the aftermath of the 2008 global financial cri-

sis were among the changes. Between 2009 and 2018, some consumer durables, such as furni-

ture and household appliances, as well as vehicles, were temporarily exempted from excise

taxes seven times in total. These exemptions during a time of economic crisis indicate that

Turkey has been pursuing a micro-based and dynamic fiscal approach to combat the contrac-

tionary effects of the crisis and promote growth. This policy could be viewed as a kind of fiscal

policy that has recently received increased attention in the literature. (D'Acunto et al., 2018).

Inflation rates, average household budget shares of indirect taxes (indirect tax burden), and

consumption inequality as measured by the Gini index in Turkey from 2003 to 2019 are sum-

marized in Figure 1. We see varying indirect tax burdens with moderately rising inflation

between 2003 and 2008, with a considerable reduction in nominal consumption inequality at

the same time. The period from 2008 to 2014 is characterized by low inflation, slightly increas-

ing indirect tax burden, and rising inequality. After 2014, the tax burden fluctuated, with signifi-

cant drops. Inflation rose sharply in the years after 2016, but taxes fell slightly. During this

period, nominal consumption inequality remained stable.

This study has two main aims. The first is to decompose the change in real consumption inequal-

ity in Turkey between 2003 and 2019 into two components—changes in prices and changes in nomi-

nal consumption levels—and to determine the relative contributions of each component to the

change in real consumption inequality. The second aim is to decompose the change in prices into its

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