Indirect Taxes, Inflation and Inequality in Turkey

One way inflation affects inequality is through its varying impact on the purchasing power of different households. Indirect taxes, which affect commodity price levels, are another effective factor influencing 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 applies the commonly used method in the literature to analyse distributional consequences of household level inflation rates, and extends it to analyse the role of indirect tax changes in this relationship. The analysis is carried out using both household-level data and artificial panel data created to apply the Shapley and Owen decomposition methods. The findings indicate that while nominal consumption during the 2003–2019 period became more equal, real consumption inequality increased as a result of price changes during that time. Another striking finding is that changes in indirect taxes account for 31–57% of the unequalizing effect of price changes, depending on the method used.