The paper investigates the effectiveness of countercyclical fiscal policy by using firm‐level data from Turkey and in particular the effects of consumption taxes on firm sales. We exploit a unique natural experiment: As part of its fiscal response package, Turkey temporarily lowered consumption taxes for selected durables. By using data on sales from firms that sell goods which were covered by those tax cuts and those that sell goods which were not, we are able to perform a difference‐in‐difference analysis and control for all time variant sector specific factors that might have impacted on firm sales. While theory predicts positive effects on firm sales as a result of temporary consumption taxes under certain conditions, our results so far indicate that these conditions may not have been fulfilled and that in Turkey, temporary cuts in consumption taxes were not the most suitable measure to stimulate economic activity.
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