And now taxes
When rain is forecast, we take precautions. When it is raining we take measures. In our economy, rain is now a certainity. Will tax reduction work?
The new tax reduction scheme
is designed to prop up the economy. Will it work?
Tax deduction is a sign that things are in danger
If rot has set into the economy, if prices are rising, if certain sectors have accumulated stocks and intensive layoffs are on the horizon, you should institute measures that will calm the market for a while. The tax measures that the Treasury and Finance Minister, Berat Albayrak, announced last week are a sign that things are more complicated. Even the “Total Struggle with Inflation” program, announced in October, will remain insignificant compared to the tax cuts.
Differences from the inflation fight
The “Total Struggle with Inflation” program is based on voluntarism and it is not possible to see how it will yield results. However, the tax deduction decision is very concrete, and it is an austerity package where the results are very obvious.
Tax deduction will not be effective on real estate
Although the measures announced by Albayrak seem to concern four sectors, it is unlikely that there will be a mobilization in real estate because the tax and mortgage allowance for this sector is not new, only the deadline has been extended. We did not see any improvements in the period of tax and duty deduction so there will hardly be an improvement when the deadline is extended.
Some sectors will revive
However, tax cuts will create a significant boost in the automotive, white goods and furniture sectors. Even if such tax relief does not provide vitality in these sectors, it will provide relief because the situation is grave beyond estimations.
There will be side effects
Even the most innocent medications have side effects. These measures, which will be a lifeline for some sectors, will also have side effects. Of course, we will not notice these effects today to tomorrow, but after some time they will inevitably emerge.
Equilibrium in the economy
First, the discourse on the balancing of the economy has been damaged. On the other hand, we do not know exactly what is meant by the discourse of balancing. Presumably it refers to the slowing of rap- id growth, the decrease of the fluctuation caused by rapid growth, the reduction of volatility in every sense, etc.
Tax loss will damage the austerity principle
Now, in order to stimulate the economy, we are applying “artificial” and “temporary” measures that do not get to the heart of the problem. This is doping, plain and simple, and it will make us feel good for a while. Businesses will experience some improvement. Both the producer and the consumer will be pleased. However, there will be a tax loss and this loss will damage the austerity principle. We do not know the size of the loss, and we do not know whether this tax reduction will be extended or not. This has to be taken into consideration.
What happens when the deduction ends?
There is a reality that applies to both tax deductions as well as the “Total Struggle with Inflation” program. CPI is calculated based on prices including all taxes. The producer price index, on the other hand, is based on pre-tax prices. So the tax deduction will definitely have an effect on the consumer price index. There will be relatively low price movements in November and December, which should not be read as a fall in CPI. We are talking about a more moderate rate.
Prices will suddenly climb up
But it is clear what will happen when the time has expired and the taxes are brought to previous levels: Prices will climb up suddenly. So January seems to be a very critical month. On the one hand, following the inflation prevention program, discounters will also bring their prices back to previous levels, perhaps even setting a higher price to compensate for the discount; on the other hand, taxes will increase to the normal level. So the prices will increase automatically.
There may be an extension due to the local elections
So we are likely to see a record increase in prices in January. There may be a gradual transition to the previous level after the tax deduction announced last week expires. Turkey is moving toward local elections in 2019. There will not be a Presidential Alliance in the local elections. Therefore, Istanbul and Ankara are not considered guarantees, as they were during the Presidential Alliance. Therefore, the tax deduction may continue to be implemented for a few months into 2019 as well, at the expense of tax revenue.