econmodels.comeconmodels.com/upload7282/4be52bccdcd2cbf9872ea95f9bd820e… · web viewfrom...
TRANSCRIPT
The Invisible and Asymmetric Tax Policy in Gasoline Prices:
The Case of Turkey
Ozgur Bor
(Corresponding Author)
(Atilim University, Department of Economics, Kizilcasar Mah., Incek-Golbasi, 06680, Ankara, Turkey;
Tel. +90 (312) 586 86 36;Fax. +90 (312) 586 8091; e-mail: [email protected]
Mustafa Ismihan
(Atilim University, Department of Economics, Kizilcasar Mah., Incek-Golbasi, 06680, Ankara, Turkey)
1
Abstract
This study analyzes the role of tax policy in gasoline prices in Turkey by utilizing time series
techniques. It provides and compares empirical results by using daily gasoline prices between
January 2005 and December 2013, with and without the effect of taxation. Our results, based on the
threshold cointegration analysis, indicate asymmetric adjustment between retail and crude oil
prices over the long-run. These results are in line with the “rockets and feathers” phenomenon; that
is, retail prices tend to rise faster than they fall in response to crude oil price changes. Additionally,
our results, with retail prices including taxes, indicate a negative threshold value, which implies that
the Turkish governments follow asymmetric taxation of gasoline prices through adjusting excise
taxes. Nevertheless, one can miss the big picture in gasoline pricing by concentrating only on the
adjustment dynamics. Therefore, we also analyzed and compared the long-run relationships between
crude oil and gasoline prices with and without taxes. The results indicate that Turkish governments
succeeded at implicitly imposing an exceptionally high tax burden on gasoline (about 62%) over the
longer term by adjusting non-salient excise tax amounts on gasoline and benefited from the resultant
tax revenues as means of public finance.
2
1. Introduction
In many oil importing economies retail prices of gasoline depend largely on changes in crude
oil prices and exchange rate movements. However, the role of taxation on the level of the retail
prices of gasoline is an important but somehow neglected issue in developing countries. In some
emerging market economies the fiscal authorities resort to taxes on petroleum products excessively
to create resources for financing the budget. Therefore, the amounts of taxes contribute both to the
adjustment as well as the level of the retail prices of gasoline.
An interesting feature of the oil products is the asymmetric price adjustment in retail prices.
In response to international crude oil prices retail oil prices tend to rise faster than they fall; a
phenomenon, Bacon (1991) calls “rockets and feathers”. Several theoretical explanations; such as
oligopolistic pricing, asymmetric consumer searching behavior, and the role of inventories, are used
to explain this phenomenon (Bacon and Kojima, 2010). Price asymmetries are important because the
existence of such asymmetries imply that consumers are not benefiting from price reductions as in
the case of symmetric price adjustment. Therefore, price asymmetries have important welfare
implications (Meyer and Cramon-Taubadel, 2004:582).
Bacon and Kojima (2010) note that asymmetric pricing in oil products is observed in all
studies conducted on eight developing countries. i However, for developed countries, the empirical
evidence on rockets and feathers pricing is mixed as a result of differences in econometric
specification, data frequency (daily, weekly, biweekly, monthly), the time period, the scope of the
transmission chosen and whether the prices include taxes or not (Grasso and Manera 2007). Two
seminal studies on the US economy exemplify the importance of these differences. Borenstein et al.
(1997) used a non-standard error correction model and weekly data over the 1986-1998 period to
test the asymmetry of the US gasoline prices. They found that retail gasoline prices rose quickly
following an increase in the price of crude oil, but fell slowly following a decrease. Contrarily,
Bachmeier and Griffin (2003: 772) noted that “daily data may provide more reliable estimates than
3
weekly data … [since] aggregation over time can create a type of omitted variables bias problem”.
They used a standard Engle-Granger error correction model with daily data over the 1995-1998
period, and found no evidence of asymmetry in the wholesale gasoline prices. They found similar
results when they employed Borenstein et al.’s (1997) non-standard specification on daily data, and
reached the conclusion that Borenstein et al.’s (1997) results were fragile.ii Their studies demonstrate
that econometric choices are highly influential on empirical outcomes, and confirm Geweke’s (1978)
conviction that daily data mitigate estimation bias of aggregated (e.g. weekly, monthly) data, when
available. Lastly, it is also important to mention that more recent studies employed more flexible and
efficient methods like threshold cointegration techniques, compared to the standard cointegration
(Engle-Granger) and asymmetric error-correction models, for analyzing asymmetric adjustment
between retail prices and crude oil prices (see Mann, 2012 and the references cited therein for
an overview of the threshold cointegration techniques and the related literature).
In Turkey, prices of oil products have been high for a long time and this has been affecting
the welfare of the society seriously.iii Despite the importance of this topic, Alper and Torul (2009)
appear to be the only relevant research on Turkey. By using monthly data for the 1991-2007 period,
and employing a structural VAR model iv with first differenced data, they found that retail gasoline
prices in Turkey responded to increases in international crude oil prices more than the decreases.
The authors attributed the asymmetry mainly to the government’s price setting policies via taxation
and pointed to a common belief among economists and public that Turkish fiscal authorities used
high gasoline taxes to create resources to finance government budget. Nevertheless, Alper and Torul
(2009) focused on the rockets and feathers pricing in Turkish economy with first differenced data and
hence they lost valuable information contained in the level of price variables, which would otherwise
be utilized in cointegation analysis for understanding the existence of high oil prices over the long
run. In other words, asymmetric price adjustments in the short run may not explain the existence of
high level of prices in the long run, so one can miss the big picture in gasoline pricing by
4
concentrating only on the short term price adjustment dynamics. Therefore, for a more thorough
analysis long run (level) relationships with and without taxes should be analyzed and compared.
In this study, we investigate the role of tax policy in gasoline pricing in Turkey with daily data
from 4th of January 2005 to 31st of December 2013. In order to identify the role of taxation in gasoline
pricing, we provide empirical results, by employing the popular threshold cointegration analysis
developed by Enders and Siklos (2001), on gasoline price data with and without taxes. Additionally,
we give a particular emphasis to the long-run (level) relationships between crude oil prices and
gasoline prices with and without taxes, which is a neglected issue in the existing literature on
gasoline pricing.
The rest of the paper is organized as follows. Section 2 provides an overview of the role of oil
and its taxation in the Turkish economy. The model, data and empirical results are provided in
Section 3. Finally, Section 4 provides the concluding remarks.
2. The Role of Oil and Its Taxation in the Turkish Economy: An Overview
Turkey is an emerging market economy and a net importer of oil. Turkey produced only
around 7-8% of its total petroleum consumption between 2005 and 2013.v As a consequence of high
dependency on oil imports, crude oil price movements in international energy markets have a direct
impact on domestic retail prices of oil products. This dependency also contributes to the high current
account deficit of the Turkish economy (about 10% of GDP in 2011).
In Turkey, until 2005 the government determined retail gasoline prices.vi With the Petroleum
Market Law No:5015, that entered into force in 2003, Energy Market Regulatory Authority (EMRA)
became responsible from guiding, monitoring and surveilling the energy market. From January 2005,
the refinery prices are determined freely in the market which is regulated by the EMRA to ensure
that it reflects the developments in international oil markets and exchange rate movements.
Licensed refineries and distributors are required to notify their ceiling prices to EMRA.
5
Nevertheless, as shown in Figure 1, the total share of refineries, distributors and retailers was
less than the share of taxes in retail (final) gasoline vii prices in 2011.viii Recent annual EMRA reports on
the petroleum market make it clear that this situation is not unique to 2011. ix In sum, tax is the single
largest component of retail prices in gasoline and other oil products (EMRA, 2012).
Figure 1. The Share of Final Price Components of Unleaded 95 octane Gasoline in 2011
Refinery (Tax Free) Distributors’ Share Retailers’ Share Total Tax (VAT+SCT)
30.5
4.8 4.3
60.4
Note: SCT=special consumption tax and VAT=value added tax.
Source: EMRA (2012: 140).
Considering the high tax burden on gasoline, the retail prices of oil products are still
regulated by the government. However, it is important to underline that total tax burden comprises
of two different taxes; the special consumption tax (SCT) and the value added tax (VAT). In order to
harmonize Turkey’s indirect tax system to the European Union acquis communautaire, in 2002 SCT
on gasoline was introduced. SCT is an excise or specific tax that is charged only once. It is imposed on
specific goods and the amount imposed varies among products. The main purpose of SCT in the
European Union is to maximize the social welfare. Therefore, it is imposed on luxury, unhealthy and
polluting goods.x On the other hand, VAT is levied at each stage of the production and the
distribution process.xi In case of oil products, SCT is imposed first on importers and/or producers
6
(including refineries) and then VAT is levied on the refinery price, distributor and vendors’ share as
well as on special consumption tax. This is referred to as the taxation of an already taxed item.
Moreover, while the VAT is an ad valorem tax and its rate is fixed (18%), at least over the sample
period, SCT is levied on “per unit” basis and adjusted over time. The fact that VAT rates are fixed but
SCT amounts are adjustable leaves SCT as the only way that government could affect gasoline prices.
Predictably, the SCT amounts (on gasoline) have been changed five times since 2005 (Figure 2).
Figure 2. Special Consumption Tax Adjustments from 2005 to 2013*
1.3625 TRY1.4915 TRY
1.6915 TRY1.8915 TRY 1.8765 TRY
2.1765 TRY
01.01.2005 01.07.2008 15.07.2009 01.01.2010 18.05.2012 22.10.2012
* The special consumption tax is remained at 2.1765 TRY from 22.10.2012 to 31.12.2013
Note: TRY=Turkish Lira.Source: Turkish Tax Authority
Table 1 provides strong evidence that the government can use SCT as an “instrument” to
affect retail gasoline prices through effective tax rate, which is the total tax over retail price. It is clear
from Table 1 that the effective tax rate on gasoline is very high in Turkey, fluctuating between 60%
and 75% with an average of 66.4% since 2005. However, as explained in the following sections, the
effective tax rate is not clearly perceptible to the final users since only VAT rate (18%) is visible on the
gasoline bills of the consumers.
7
Table 1. Effective Tax Rates on Gasoline
Year Retail Price After Tax (TRY)a Total Tax (TRY)a EffectiveTax Rate (%)b
2005 2.30 1.71 74.492006 2.58 1.76 68.092007 2.78 1.79 64.332008 3.09 1.95 63.072009 2.79 1.92 68.772010 3.74 2.46 65.942011 4.19 2.53 60.402012 4.48 2.78 61.972013 4.80 2.92 60.85
aAnnual average.bEffective tax rate = (Total taxes paid /retail price including taxes)*100, where total tax=VAT+SCT.Source: EMRA (2012, 2013 and 2014)
The main motivation behind imposing excessive tax on gasoline is more obvious when one
considers the role of indirect taxes on oil products in public finance in Turkey. In fact, the two indirect
taxes (SCT and VAT) on these products constitute 19.34% and 13.50% of the total tax revenues in
2005 and 2013, respectively (EMRA, 2014: Table 3.27, p.182). However, the share of these taxes in
GDP is a better indicator for the importance of indirect taxes in the total budget and this share has
remained stable, fluctuating between 3% and 3.6%, over this period (EMRA, 2014: Table 3.27, p.182).
In sum, these figures clearly indicates that the taxes levied on oil products are an important source of
tax revenue for Turkish governments.
3. Model, Data and Empirical Results
3.1. Model and Methodology
Initially, the long run equilibrium relationship between the retail price of gasoline (RGP) and
crude oil (COP) is specified by the following equation:
RGPt=β0+β1COPt +μt, (1)
where RGP and COP are retail (output) and crude oil (input) prices (see Section 3.2 for more detail on the
definitions and sources of the data) and μ is the error term.
8
In line with the existing literature, the standard Engle and Granger (EG) approach is used in
the estimation of Equation (1) due to the possible non-stationarity in the data (see Bacon and Kojima,
2010; and Bachmeier and Griffin, 2002). Since Equation (1) relates the output or final price ( RGP) to
the input price (COP), β1 is expected to be 1, that is, the input costs are passed fully to the final
(retail) prices (see, for example, Bacon and Kojima, 2010; and Bachmeier and Griffin, 2002). However,
as will be explained in more detail in the next sub-section, β1 can exceed unity when sales taxes such
as VAT and SCT are levied. Thus, it is important to provide empirical results by using retail prices with
and without the taxes.
Engle and Granger (1987) show that cointegration exists if t is stationary [t I(0)]. Therefore,
residuals from equation (1) are used to estimate the following relationship:
t =t-1 + t (2)
where is the speed of adjustment coefficient.
Rejection of the null hypothesis of no cointegration ( 0) implies that the residuals in equation (1)
are stationary.
Enders and Siklos (2001) argue that if the adjustment is asymmetric, the standard tests for
cointegration and its extensions are mis-specified and they consider an alternative error correction
specification called the threshold autoregressive (TAR) model. When we incorporate this argument
into equation (2) we obtain,
t = It1t-1+(1- It)2t-1 + t (3)
where It is the Heaviside indicator function such that:
It=¿ (4)
and is the estimated threshold value. Note that equations (1), (3) and (4) jointly represent a TAR
model.
9
Here, 1 and 2 gives the speed of adjustment coefficients for different regimes [i.e. the adjustment
is represented by 1t-1 (2t-1) when t-1 is above (below) the threshold, ]. If 1 = 2, then the
adjustment is symmetric and the TAR model reduces to the standard Engle-Granger cointegration
model. Here, the threshold has particular importance because it implies that movements toward long
run equilibrium do not take place at all points in time but only when the divergence from equilibrium
exceeds the threshold (Ghoshrey 2011). However, as noted by Enders and Siklos (2001:167), "in a
number of economic applications it is natural to set =0 so that cointegrating vector coincides with
attractor". However, in general, is unknown and it is consistently estimated (see Enders and Siklos
2001) and we call such model(s) as Consistent TAR model(s).
In equation (4), the Heaviside indicator depends on the level of t-1 (Enders and Siklos 2001). In an
alternative suggested by Enders and Granger (1998) and Enders and Siklos (2001), the threshold
depends on the previous periods change in t-1 (t) and t series exhibit more momentum in one
direction and such model is called momentum-threshold autoregressive (M-TAR) model. Here, the
Heaviside indicator is set by using lagged changes in t.
It=¿ (5)
Considering the above issues, there are four alternative models; namely, TAR, M-TAR, Consistent TAR
and M-TAR models. In empirical applications, however, the "best fitted" model is generally
determined by utilizing the information criteria such as Akaike Information Criterion and Scwarz
Information Criterion.
It should be also noted the empirical finding of cointegration justifies the existence of an error-
correction representation (via Granger Representation Theorem):
∆ RGP t=θ+φ+¿ ECT t−1+¿+φ
−¿ECT t−1
−¿+ ∑i=1
nα
+ ¿∆ RGPt−i+¿ + ∑
i=1
nα−¿∆ RGPt−i
−¿+ ∑i=1
nβ
+ ¿∆COPt−i+¿ +¿+ ∑
i=1
nβ−¿∆ COPt−i
−¿+ϑt( 6)¿¿ ¿
¿ ¿
¿¿ ¿
¿ ¿
¿¿ ¿
10
All the lagged prices (RGP and COP) are split into positive and negative components represented by
“-”and “+” superscripts. The error correction terms “ECT” are constructed from the threshold
cointegration regressions in equations (3), (4) and (5).
As mentioned above, in order to capture the asymmetries in the short run α+¿∆ RGPt− i+¿ ¿¿ and α−¿ ∆RGPt− i
−¿ ¿¿
(the lagged gasoline price increases and decreases, respectively) β+¿∆ COP t− i+¿ ¿¿ and β−¿ ∆COPt− i
−¿ ¿¿ (the
lagged crude oil price increases and decreases, respectively) are used. Additionally, the asymmetry in
the adjustment speed is also checked by defining disequilibrium terms using φ+¿ECT t−1+¿¿ ¿ and φ−¿ ECTt−1
−¿¿¿.
We can check for the presence of asymmetry by performing a standard Wald test both on the speed
and magnitude of the adjustment by using an appropriate null hypothesis.
3.2. Data
Our data span ranges from January 4, 2005 to December 31, 2013 and the number of total
observations for each variable is 3,282.xii It should be noted that this study uses daily data since
aggregated data can create substantial econometric problems (Geweke 1978), and also daily data
provides more information for separating effects from lagged changes.
Definitions and sources of the variables are given below.xiii
COP: Crude oil prices of gasoline, in USD per liter (Fob Europe Brent spot price). Source: The US
Energy Information Administration (http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm)xiv
RGP (excluding taxes): Net retail price of unleaded 95-octane gasoline price, in USD per liter
(vendor/sale station price without taxes). Source: EMRAxv
RGP (including taxes): Gross retail price of unleaded 95-octane gasoline price, in USD per liter
(vendor/sale station price with taxes). Source: EMRAxvi
Figure 3 shows the time plot of the three variables. As expected, these variables are non-
stationary,xvii and they tend to move closely.
11
Figure 3. Time Plot of COP and RGP (Including and Excluding Taxes)
2005 2006 2007 2008 2009 2010 2011 2012 20130.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
3.3 Empirical Results
Initially, we estimate the long run equilibrium relation between retail gasoline price (excluding the
taxes) and crude oil price, as specified in Equation (1), by OLS. The results are provided in Equation
(7).
RGPt (excluding taxes) = 0.289 + 1.074 COPt (7)
(75.596) (155.839)
where t-values are provided in parentheses.
In table 2, the results for the standard Engle-Granger, TAR, M-TAR, consistent TAR and M-TAR models
are provided based on the residuals of Equation (7).xviii In all models, including Engle-Granger, two
price series are cointegrated.xix According to the results of Akaike Information Criterion (AIC) and
Scwarz Information Criterion (SIC), the Consistent M-TAR model fits the data better than the other
the models. Thus, we focus on the results of the Consistent M-TAR model.
Table 2. Estimates of the cointegration models (With retail prices excluding taxes)
12
RGP including taxes taxes
RGP excluding taxes
COP
Item Engle-Granger TAR Consistent TAR M-TAR Consistent M-TAR
Threshold ()a NA 0 +0.0631 0 -0.0001
1 -0.026***d -0.028*** -0.034*** -0.020*** -0.020*** (-6.488)e (-5.067) (-5.519) (-3.912) (-3.848)2 NA -0.025*** -0.021*** -0.037*** -0.037*** (-4.069) (-3.761) (-5.534) (-5.623)
1 -0.016 -0.016 -0.016 -0.018 -0.018 (-0.941) (-0.938) (-0.903) (-1.049) (-1.054)2 -0.032* -0.032* -0.032* -0.031* 0.031* (-1.833) (-1.830) (-1.811) (-1.799) (-1.795)AIC -1315.44 -1313.58 -1315.92 -1317.33 -1317.83SIC -1297.15 -1289.20 -1291.54 -1292.95 -1293.45Φb NA 20.850 22.032 22.748 23.000
1= 2c NA 0.140 2.474 3.889 4.385
[0.708] [0.116] [0.049] [0.036]a Estimated threshold value.b Φ represents the sample value of F statistic with the null hypothesis of 1=2= 0 (Enders and Siklos, 2001). c In this row the sample values of F statistic, for the null hypothesis 1= 2 , are provided. P-values are provided in square brackets.d Three, two and one asterisks (*) denote that the estimated coefficient is statistically significant at, or below, one, five, and ten percent level, respectively.e t-values are provided in parentheses.
The values of the adjustment parameters (1 and 2) have the correct signs and plausible values in
the Consistent M-TAR model. They also have significant p-values, and hence we can safely say that
our results suggest convergence toward the equilibrium relation. However, the estimates suggest
that the gaps arising from the long-term equilibrium due to the increase in crude oil price are
eliminated more quickly (2=-0.037) compared to the decline in crude oil prices (1=-0.020). The null
hypothesis that the adjustment coefficients are equal (1=2) is also rejected (p-value=0.036). In
sum, our results suggest that the retail and crude oil prices are cointegrated and the adjustment is
asymmetric. Thus, these results indicate asymmetric adjustment between retail prices and crude
oil prices over the long-run. In other words, our results are in line with the “rockets and feathers”
phenomenon; that is, retail prices tend to rise faster than they fall in response to crude oil price
changes.
13
It should be noted in passing that the threshold value is almost zero (-0.0001) and hence it is not
surprising that the results from the M-TAR model is very similar to those from the Consistent M-TAR
model. This confirms the robustness of our results.
The findings of cointegration with M-TAR consistent adjustment justifies estimation of the error-
correction model as specified in Equation (6). The results are given in Table 3.xx
Table 3. Results of the asymmetric error correction model (M-TAR and Consistent M-TAR) Threshold 0 -0.0001
0.000(1.181) a,b 0.000(1.030) α 1
+¿¿ 0.054(2.636)*** 0.059(2.891)*** α 2
+¿¿ -0.032(-1.735)* -0.016(-1.009) α 1
−¿¿ 0.043(1.532) 0.034(1.280) α 2
−¿¿ 0.044(2.036)** 0.044(1.533) β1
+¿¿ 0.172(4.117)*** 0.160(3.847)*** β2
+¿¿ 0.081(2.108)** 0.083 (2.486)** β1
−¿¿ 0.082 (2.414)** 0.075 (2.230) ** β2
−¿¿ 0.018(0.522) 0.054(1.370) φ+¿¿ -0.013(-2.376) ** -0.020(-4.360)*** φ−¿¿ -0.017 (-3.197)*** -0.029 (-4.360)*** R2 0.031 0.036 AIC -3091.16 -3109.68SIC -3024.11 -3042.64
a t-values are provided in parentheses. b Three, two and one asterisks (*) denote that the estimated coefficient is statistically significant at, or below, the one, five, and ten percent level, respectively (the results are based on Newey-West standard errors).
As seen from Table 3, estimates of parameters that represent short-run adjustment dynamics are
quite similar. In other words, the short run coefficients (* and *) suggest the presence of price
symmetries (for both models). Wald tests also confirm our expectations.xxi Nevertheless, it should be
noted that the speed of adjustment terms (φ+¿¿ and φ−¿¿ ) are usually sensitive to the sample period
and have poor small-sample properties (See, Enders and Siklos, 2001 and references cited therein for
more detail). Thus, probably for this reason the respective Wald test result has not shown asymmetry
14
for the speed of adjustment terms for both error-correction models based on M-TAR and Consistent
M-TAR models.xxii
In line with the aim of this study, we continue our analysis by estimating the long run relation
between retail gasoline price (including taxes) and crude oil price.
The OLS estimates of the long-term relationship between the two oil prices are provided in Equation
(8).
RGPt (including taxes) = 1.467 + 1.620 COPt (8)
(166.841) (102.273)
where t-values are provided in parentheses.
Table 4 presents the results for the standard Engle-Granger, TAR, M-TAR, consistent TAR and M-TAR
models based on the residuals of Equation (8).xxiii In all models, including Engle-Granger, two price
series are cointegrated. However, based on the AIC and SIC, Consistent TAR model fits the data better
than the rest of the models.
Table 4. Estimates of the cointegration models (With retail prices including taxes)
Item Engle-Granger TAR Consistent TAR M-TAR Consistent M-TAR
Threshold ()a NA 0 -0.1314 0 -0.0118
1 -0.014***d -0.012*** -0.010** -0.013*** -0.012*** (-4.522)e (-2.978) (-2.516) (-3.328) (-3.312)2 NA -0.016*** -0.021*** -0.016*** -0.022*** (-3.471) (-4.207) (-3.131) (-3.410)
1 -0.044** -0.044** -0.043** -0.043** -0.042** (-2.392) (-2.505) (-2.462) (-2.499) (-2.433)2 -0.042** -0.042** -0.041** -0.042** -0.042** (-2.392) (-2.382) (-2.358) (-2.393) (-2.386)AIC 2324.48 2326.17 2323.08 2326.20 2324.51SIC 2342.77 2350.55 2347.46 2350.58 2348.90Φ b NA 10.379 11.930 10.360 11.210
1= 2c NA 0.314 3.397 0.278 1.965
[0.575] [0.065] [0.598] [0.161]a Estimated threshold value.b Φ represents the sample value of F statistic with the null hypothesis of 1=2= 0 (Enders and Siklos, 2001).
15
c In this row the sample values of F statistic, for the null hypothesis of 1= 2 , are provided. P-values are provided in square brackets.d Three, two and one asterisks (*) denote that the estimated coefficient is statistically significant at, or below, one, five, and ten percent level, respectively.e t-values are provided in parentheses.
In the Consistent M-TAR model, the values of the adjustment parameters (1 and 2) have the correct
signs and plausible values. Again, they also have significant p-values, and hence we can safely say
that our results suggest convergence toward the equilibrium relation. In this case, the null hypothesis
of symmetric adjustment (1=2) is rejected at 6.5% significance level (p-value=0.065). Thus, there is
some evidence of asymmetric adjustment between retail prices and crude oil prices over the long-
run.
Additionally, our results, with retail prices including taxes, indicate a negative threshold value, =-
0.1314, (compared to almost zero threshold value with retail prices excluding taxes) which may imply
that the Turkish governments follow the asymmetric taxation of gasoline prices via adjusting excise
taxes. That is, the retail prices with taxes are adjusted more quickly (2=-0.021), in response to the
rise in crude oil prices, beyond the threshold value since the government may temporarily delay the
adjustment of excise tax possibly with the aim of preserving political popularity. Thus, reduction in
the profit margin up to a certain point is bearable for firms for a while due to a delay in the
adjustment of excise taxes, but beyond the threshold value a further reduction in the margin is a
threat to profitability and hence different behavior is adopted by the firms.
The findings of cointegration with TAR consistent adjustment justifies estimation of the error
correction model (the results are given in Table 5). In line with the previous case (without taxes), as
can be seen from Table 5, estimates of parameters that represent short-run adjustment dynamics are
quite similar, and hence short run coefficients (* and *) suggest the presence of price symmetries.
Again, Wald tests confirm our expectations.xxiv However, now the Wald test result has shown some
evidence of asymmetry for the speed of adjustment terms (p-value=0.066).
16
Table 5. Results of the asymmetric error correction model with consistent TAR cointegration.Item Estimate
θ -0.000 (-0.669) a,b
α 1+¿¿ 0.017 (0.690)
α 2+¿¿ - 0.002 (-0.078)
α 1−¿¿ 0.026 (0.715)
α 2−¿¿ 0.035 (1.216)
β1+¿¿ 0.331 (6.297)***
β2+¿¿ 0.157 (3.151)***
β1−¿¿ 0.144 (0.858)
β2−¿¿ 0.265 (1.265)
φ+ ¿¿ - 0.008 (-2.469)**φ−¿¿ - 0.020 (-3.860)***
R2 0.032AICSIC
1107.301174.35
a t-values are provided in parentheses. b Three, two and one asterisks (*) denote that the estimated coefficient is statistically significant at, or below, the one, five, and ten percent level, respectively (the results are based on Newey-West standard errors).
As we mentioned before, one can miss the big picture in gasoline pricing by concentrating only on
the adjustment dynamics. Therefore, now, we analyze the long-run relations in more detail.
As noted in Section 3.1, the retail price of gasoline (RGP excluding taxes) is expected to fully
adjust to the changes in crude oil prices (COP), and accordingly, parameter of COP (β 1) is expected to
be 1. As is seen from Equation (7), the estimated value of this parameter is 1.074 (close to 1), and
therefore, it follows the theoretical expectation. However, as can be seen from Equation (8), the
response of gasoline prices (including taxes) to crude oil price changes is much higher (1.62), and it
exceeds unity. This means that one dollar increase in the price of crude oil reflects as an increase of
1.62 dollars on the retail price, 62 cents of which go to the tax authority. Ironically, Turkish
government succeeded at implicitly imposing an exceptionally high tax rate of 62%, [(1.62 – 1)*100]xxv
on gasoline over the longer term by adjusting the SCT amounts on gasoline as explained in Section 2.
17
This, in turn, implies that SCT is the main policy instrument in the price setting process of gasoline. It
should be recalled that VAT is an ad valorem tax and its rate is fixed at 18% in Turkey but SCT is levied
on “per unit” basis and it is not prominent (visible) to final users. Consequently, the SCT amounts
have been altered five times over the sample period (2005-2013), which confirms that the ruling
governments have preferred to adjust SCT over the long run.
In sum, the above results provide explanation to the persistence of high gasoline prices in
Turkey, which is arising from the reliance of Turkish government on indirect taxes as an instrument of
public finance. Therefore, Turkish governments benefited from crude oil price increases in the long-
run by adjusting the SCT amounts in such a way that the tax burden on gasoline is implicitly fixed at
around 60%. This result is consistent with the recent empirical evidence that individuals under react
to taxes when they are not visible and this limited attention to taxes may have serious welfare
consequences (Chetty et al., 2009).
4. Conclusion
This study investigated the role of taxation in gasoline prices in Turkey by using daily data
between 4th of January 2005 and 31st of December 2013. Our results, based on the threshold
cointegration analysis, indicate asymmetric adjustment between retail prices and crude oil prices
over the long-run. These results are in line with the “rockets and feathers” phenomenon; that is,
retail prices tend to rise faster than they fall in response to crude oil prices. Additionally, our results,
with retail prices (including taxes) indicates a negative threshold value which implies that the Turkish
governments follow asymmetric taxation on gasoline prices through adjusting excise (indirect) taxes.
However, one can miss the big picture in gasoline pricing by concentrating only on the price
adjustment dynamics, which is a commonly followed perspective in this literature. Deviating from the
scope of existing studies, we also analyzed the long-run relationships between crude oil prices and
gasoline prices with and without taxes. This is important because Turkish Tax Authority seems to
18
employ indirect taxes (especially, SCT) as a policy instrument with an aim to maximize its tax revenue
from oil products including gasoline. As a result, the nature of the taxation of gasoline is complicated
and its effects on the retail prices are not straight forward. Therefore, long-run analysis of price
dynamics with and without the effect of taxation on gasoline is a valuable empirical exercise.
Our results indicate that one-dollar increase in the price of crude oil leads to an increase of
1.62 dollars on the gross retail price of gasoline over the long-run. This, in turn, implies that 62 cents
(or 62 %) goes to the tax authority. Nevertheless, it is important to stress that 62 cents consists of the
tax revenues arising from the imposition of SCT and VAT (including the VAT on SCT amounts)
However, only VAT amount is visible to the final users and the amounts of SCT and VAT part of SCT
(although included in VAT) are hidden within the retail price of gasoline.
To sum up, the Turkish government implicitly imposes an exceptionally high tax rate on
gasoline over the long-run, by frequently adjusting the excise tax amounts which are not visible to
final consumers (only VAT amounts, 18%, are visible on bills). The main motivation behind this
behavior is the over-dependence of Turkey on the indirect taxes as a means of public finance. Thus,
this study indicates that the indirect tax revenue obtained from gasoline sales contributes
substantially to the Turkish governments' budget at the expense of consumer welfare. It is,
therefore, not unfair to say that the Turkish governments affect the gasoline pricing via “Invisible
Tax” Policy.
The findings of this paper suggest the following policy implications: First, the gasoline prices
should be monitored more carefully by Energy Market Regulatory Authority, considering the
evidence on “rockets and feathers” phenomenon, since consumers are not benefiting from price
reductions in a timely manner and this, in turn, results in welfare losses. Second, the government
must avoid the “Invisible Tax” Policy applied on gasoline as well as on other oil products since such
policies also creates consumer welfare losses. In other words, there is a need for more transparent
tax policy in a way that tax amounts on oil products become more visible to final consumers.
19
References
Al Gudhea, S., Kenc, T., and Dibooglu, S., (2007) Do retail gasoline prices rise more readily than they
fall? A threshold cointegration approach. Journal of Economics and Business 59:560-574.
Alper, C.E.,andTorul, O., (2009) Asymmetric adjustment of retail gasoline prices in Turkey to world
crude oil price changes: the role of taxes. Economics Bulletin 29(2):775-787.
Bacon, R. W.,(1991) Rockets and feathers: The asymmetric speed of adjustment of U.K. retail gasoline
prices to cost changes. Energy Economics13:211-218.
Bacon R.W.,and Kojima M., (2010) Rockets and feathers: Asymmetric petroleum product pricing in
developing countries. Extractive Industries for Development Series #18,June 2010, The World Bank.
Bachmeier, L.J., and Griffin,J.M., (2003) New evidence on asymmetric gasoline price responses. The
Review of Economics and Statistics 85(3):772-776
Borenstein, S., Cameron, A.C., and Gilbert,R., (1997)Do gasoline prices respond asymmetrically to
crude oil prices? Quarterly Journal of Economics 112(Feb):305-39.
Chetty, R., Looney, A., and Kroft, K. (2009) Salience and taxation: theory and evidence. American
Economic Review 99(4):1145-1177.
Enders, W. and Siklos P.L. (2001) Cointegration and Threshold Adjustment. Journal of Business and economic Statistics 19(2): 166-176.
Energy Market Regulatory Authority (EMRA), (2012) Petroleum Market Sector Report 2011.
Petroleum Market Department, Ankara.
Energy Market Regulatory Authority (EMRA), (2013) Petroleum Market Sector Report 2012.
Petroleum Market Department, Ankara.
Energy Market Regulatory Authority (EMRA), (2014) Petroleum Market Sector Report 2013.
Petroleum Market Department, Ankara.
Engle, R.F., and Granger C.W.J. (1987) Cointegration and Error Correction: Representation, Estimation
and Testing Econometrica, 55:251-276.
Geweke,J.,(1978) Temporal aggregation in the multiple regression model. Econometrica 46(3):643-
61.
Ghoshrey A. (2011) Underlying Trends and International Price Transmission of Agricultural
Commodities, ADB Economics Working Paper Series 257, Asian Development Bank.
21
Granger, C.W.J., and Lee, T.H., (1989) Investigation of production, sales and inventory relationships
using multicointegration and non-symmetric error correction models. Journal of Applied
Econometrics 4:145–159.
Grasso, M., and Manera,M., (2007) Asymmetric error correction models for the oil-gasoline price
relationship. Energy Policy35:156-177.
Mann, J. (2012). Threshold cointegration with applications to the oil and gasoline industry. PhD
Thesis, Queen's University. https://qspace.library.queensu.ca/bitstream/1974/7281/1/Mann_Janelle
_M_ 201206_PhD.pdf
Meyer, J., and Cramon-Taubadel, S.V., (2004) Asymmetric price transmission: a survey. Journal of
Agricultural Economics 55(3):581-611.
22
i See Bacon and Kojima (2010) for more detail on these eight studies.iiA more recent study by Al-Gudhea et al. (2007) investigated crude, spot, wholesale and retail gasoline adjustments in the US. They have used daily data for the period from December 1998 to January 2004 and tested for asymmetries by using a set of cointegration and error correction models with non-linear adjustment. They have found that prices were cointegrated and long run equilibrium adjustments were asymmetric.iiiAs of the end of January 2013, Turkey has the highest retail gasoline prices in the world. In August 2012, Turkey was the second in the world –closely behind Norway whose real average income is more than three times that of Turkey. (http://www.bloomberg.com/slideshow/2012-08-13/highest-cheapest-gas-prices-by-country.html #slide1)ivSpecifically, they stated that the span of time period in their study is 17 years and it cannot justify long-term relation properly (Alper and Torul, 2009: footnote 10). Even though this concern seems to be right, when one considers the other studies in the literature (i.e. those cited in Grasso and Manera, 2007), including monthly data, the span of time period is less than 20 years and usually not more than ten years in the case of weekly and daily data. Therefore, from this point of view, Alper and Torul’s justification is not valid. v Source: U.S Energy Information International Energy Statistics (www.eia.gov).viDuring the 1998-2004 period, Automatic Pricing Mechanism was used. This system determines the ceiling prices for oil products based on CIF Mediterranean Market spot prices.viiUnless stated otherwise, gasoline refers to the unleaded 95 Octane gasoline throughout this study.viiiThe retail price is calculated by adding the refinery price, the distributors’ profit, retailers’ (sale stations) share, the special consumption tax and the value added tax.
ixDuring 2009-2011 period, the distributors and the vendors’ total share is about 9.5%, the refinery price is around 27.5% and the remaining lion’s share of 63% belongs to the taxes.xHowever, SCT is imposed even on basic consumption goods in Turkey.xiIt is a general consumption tax that covers all goods and services and applied to all stages from producer and consumer and calculated from the transaction value.xiiFor the missing data concerning the weekends and the national holidays, the latest figure (i.e. before the weekend/holiday) is used, considering the fact that gasoline is also used during holidays.xiiiConsidering the purpose of the study and the role of taxation in oil products, we have used two different data sets. The first set consists of gasoline retail prices (excluding taxes) and the second one includes taxes (gross retail prices). We also converted the TRY-denominated prices to US Dollar in order to eliminate the role of exchange rate changes on pricing (see Alper and Torul, 2009). The exchange rate data, for the conversion, is taken from Turkish Central Bank.xivFor the sake of consistency and comparison, we have converted the unit of the original series from barrel to liter.xvThe daily prices are the average prices of eight distribution companies with the highest market share in İstanbul (the European Side) and are obtained from EMRA’s annual reports. xviSee the previous footnote.xvii These variables have unit roots. Formal (ADF) tests are available upon request from the authors.xviii Akaike Information Criterion (AIC) suggested that two-lagged changes, as shown in Table 2, are adequate.xix As shown in the first column of Table 2, the t statistic for the coefficient of equals to -6.488. Therefore, the Engle-Granger test indicates that the two price series are cointegrated at 1 % level. Φ (F) statistics, Enders and Siklos (2001), indicate that two series are cointegrated in all other four models [Note that the critical values from Enders and Siklos (2001) are used]. xx According to the Breusch-Godfrey tests, the residuals are not serially correlated in all the error-correction models reported in this paper. Nevertheless, the Newey-West standard errors are used for the t-tests.xxi Wald test results (not reported), as explained in Section 3.1, do not provide empirical evidence on asymmetric pricing in the short-run. Test results can be provided upon request from the authors.xxii The null hypothesis of symmetric speed of adjustment is not rejected in both error-correction models based on M-TAR and Consistent M-TAR models (p-values are 0.67 and 0.30, respectively).xxiii As in the previous case (without taxes) two-lagged changes are adequate based on the AIC.xxiv Again, upon request, test results can be provided from the authors.xxvIn this case, β1 is expected to be 1+effective tax rate over the long-run. In fact, 62% is very close to the arithmetic average of effective tax rate on gasoline, 65.3%, from 2005 to 2013 (Table 1).