What does Currency Transaction Tax mean?

Well, I’ve actually explained this issue in details by giving some quite basic examples in one of my recent videos on YouTube, but let us remember it again and ask one important question:

Do the latest taxes imposed by the Government actually mean some sort of restriction on capital movements? First of all, taxes do not lead to any restriction on the free movement of capital whatsoever because you have to levy taxes on corporate transactions as well in order to limit the movement of the capital. Since the Government did not make anything like that yet, the only currency transaction tax we are facing now is an amount above 1%, quite higher than the previous tax levels, on persons whose business doesn’t involve any currency related transactions, yet who wish to buy and sell foreign currency.

As a matter of fact, many Government policies and practices brings some restrictions on capital movements in either short run or transiently. So, the current level of tax on currency transactions is actually quite reasonable. Everyone seems to be afraid of a potential market crisis caused by a rapid deprecation of Turkish Lira but as Caesar said in Shakespeare’s play, Julius Caesar “Cowards die many times before their deaths”, we eventually meet what we fear. As I have said many times before, exchange rate USD to TRY has exceeded TRY 7 over the last eight years, which means our bad luck hasn’t improved a bit since we tried to deal with the results whereas we should have tackled the causes. The Government tried to lower USD to TRY exchange rate by blaming the so called “foreign forces” for the situation.

I think the Government clearly understands now, as their predecessors understood once, that it possibly can’t prevent people from buying Dollar and Gold as these people do not trust in Turkish Lira, not one bit. So, the Government says, “Want to buy foreign currency? Here’s the tax! Pay it!” Now, to have a better insight into this issue, let’s take a look at the amount of tax levied on tobacco products.

In almost each of my conferences, I tend to ask the following question: “Who here are smokers?” At first, they shy away a bit from revealing themselves, thinking that I’m about to humiliate them in public. But after a quick explanation that it’s just a simple question with no ulterior motives, they agree to do it. Following a warm round of thanks to everyone who answered my question, I say: “Your taxes keep the economy stimulated”.

Now, get ready for quite an interesting fact: the total amount of taxes collected on tobacco products this year might actually be almost equal to total corporate tax placed on a firms’ profit by the government. I’m not kidding. It looks like 65 billion TRY out of a total SCT (Special Consumption Tax) of 176 billion TRY within this year’s budget will actually come from tobacco products. In other words, 37% of total SCT revenue will be consisted of tobacco products. The corporate tax target for 2020 is 89.4 billion TRY but it seems like the Government may not be able to achieve such high tax revenue under the economically difficult circumstances.

“No one says ‘Don’t do it’… But you just have to know that if you do it, you have to pay the price…”

Here’s what I’m trying to tell, the Government doesn’t actually say, “Don’t smoke” It just says, “It would be better if you didn’t smoke. But if you must do it, here’s the tax you must pay for it!” The same thing goes for foreign currency and gold transactions. No one interferes in anyone’s “buying and selling” routines because obviously, it just isn’t stoppable. The Government very well knows that the means of forex buying and selling must remain liberated to prevent black market trade.

Please let’s not try to discuss this issue using arguments like the Tobin tax or capital flow restrictions. The Government needs money and that’s why it wants to hit two birds with one stone. It wishes to help ease the price movements while collecting taxes from people engaged in forex trade. If the Government did actually want to place restrictions on capital flows, it would levy taxes on firms’ currency transactions as well.

I can almost hear you ask, “But, is it actually a good thing?” Honestly, I don’t think it is. From our current foreign trade regime to ever-changing Decree No.32, we are already pushing the limits of market rules. But, all of this is being ignored for now since every other country, including the United States, are taking similar precautions. We shall see together whether these taxes and restrictions will remain effective or not once things get back to normal.

Perhaps, we should ask ourselves, “Will any of this bring any good at all?” Let me tell you frankly that it won’t. FX rate will rise again in the future. Everything we have always feared will become real, because, instead of trying to eliminate the causes, we like to tackle the results.