A Preliminary Analysis on the Long run Relationship between Taxation and Growth in Turkey

Although higher taxation may lead to a fall in growth rates through distortion of decisions to invest and save, certain tax policies of the government may also enhance economic growth when government investments aiming at improving the infrastructure induces private investment. This study aims to explore the effects of taxation on growth in Turkey during the period of 1975-2004, by the use of time series analysis. In addition to total taxation, direct and indirect taxes are considered separately (income tax, goods and services tax and foreign trade tax). Engle-Granger two-step cointegration results show that as total taxation/GDP ratio and trade taxation/GDP ratio increase, growth rate decreases. There is no evidence of a long run relationship between goods and services tax/GDP ratio and growth. As for the nondistortionary income taxation, the relationship is in the reverse direction: as growth rate increases, income tax/GDP ratio increases.