‘Black swan’ in Turkish government’s new economic plan
Significant tax rises have definitely left their marks on the Turkish government’s new economic program, which was unveiled on Sept. 27, becoming the “black swan” of it.
The government announced such highly unexpected hikes in some taxes that almost all bank and automotive stocks and the Turkish currency plunged and triggered Turks to fill their social media feeds with harsh criticism against or jokes about these hikes.
The government introduced a 40 percent rise in motorized vehicle tax for private cars and also increased another tax that is paid by Turks when buying a new car.
In addition to the hikes in income taxes, a 10 percent tax on winnings from lotteries was hiked to 20 percent, while a special consumption tax will be imposed on cigarette papers and energy drinks, among many others.
A 130-item draft law on these tax hikes and various others was presented to parliament late on Sept. 27.
The government made huge hikes in indirect taxes before, mainly in alcoholic drinks and cigarettes. Even Finance Minister Naci Ağbal accepted that the indirect taxes on these items and automotive were very high. High taxes on alcoholic drinks and cigarettes now bring nothing but a significant rise in ethyl alcohol sales among Turks to use when making own drinks at home or in rolled cigarettes. Besides, these taxes have reached high elasticity rates as the government does not earn much from them.
By keeping these points and most important of all, high inflationary effects of them, the government seems to raise automotive taxes rather than these two. The sustainability of this policy is questionable though, at least for consumers.
Turkey’s Finance Ministry and the state budget seem to be the key driver to fuel the country’s economic growth, which is given (maybe too) high importance by the government. The program puts 5.5 percent growth target for the following three years for each. The state already played a crucial role in reviving economic activity following a number of negative developments over the last year, including bomb attacks and a failed coup attempt. A series of temporary tax cuts have already pushed Turkey’s budget deficit, although the gap is still at manageable levels, but the ministry seems to keep supporting the economic activity in the face of a visible decline in foreign investments.
Between January and July 2017, Turkey lured $5.7 billion of foreign investment, compared to $6.3 billion over the same period last year - a 9.7 percent drop.
What was quite unexpected was that corporate taxes in the financial sector were raised from 20 percent to 22 percent. The banking index in the stock exchange fell as much as 3.5 percent following the government’s announcement, with the sharpest plunges being seen in the country’s largest lenders’ stocks.
Why does the government bring about tax rises for only one sector? Some top officials’ continuous warnings to banks, which make record high profits, to lower interest rates are a very well-known fact in Turkey. Whatever the reason behind this sector-specific tax hike is, top economy officials must explain in detail to the outside world why they took this step due to heavy share of foreign positioning in the system.
Ağbal said on Sept. 28 the country’s financial sector was “strong and resilient enough to pay these new taxes.”
More should be said in this area. Otherwise, it will be quite difficult for Turkey to attract local or foreign investors into this sector and automotive industry as well.
The government aims to add 28 billion liras ($8 billion) to the revenue budget in 2018 and to allocate an additional 8 billion liras ($2.3 billion) of existing revenues to defense spending.
The government also plans to decrease corporate taxes in a number of key production sectors of strategic importance.
In an attempt to offer a higher predictable outlook in a lowering liquidity climate, the government must immediately unveil new incentives, which will increase the share of private investments, and fairer tax reforms.