Taxes and Private Consumption Expenditure: A Component Based Analysis for Turkey

The purpose of this paper is to analyze empirically the short- and long-run effects of tax shocks on private consumption expenditure on component basis in Turkey. To do so, first, we decomposed private consumption expenditure into four major sub-categories, including food, education, and transportation, among others. And then, we employed a Structural VAR (SVAR) model which was calibrated to quarterly data set for the period 2003:Q1-2013:Q3. Specifically, our empirical findings show that the effects of tax shocks on the components of private consumption expenditure differ in the short- and long-run. In the short-run, all the taxes which we considered have a significant effect on the components of private consumption expenditure, whereas in the long-run only two taxes the VAT and the personal income tax– affect it. However, it is important to highlight that the components of private consumption expenditure are much more affected by the VAT in the both short- and long-run. In brief, the findings reveal that the effects of tax shocks on private consumption expenditure shows difference, changing according to sorts of taxes, components of the expenditure, and the length of period.