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A European VAT on financial services?

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  • Harry Huizinga

Abstract

EU financial services are exempted of VAT for technical reasons. This paper argues that the changed nature of bank-client relationships and advances in information technology have opened the door to a practical way of redressing this exemption. The proposed solution is to charge the regular VAT on services supplied to households, but no VAT on those supplied to businesses, while allowing financial institutions the normal VAT credit for all of their purchased inputs. Financial services would, as a result, be priced differently for households and businesses so banks would have to verify their customers' VAT status. While this may be burdensome, the OECD-wide fight against tax evasion and the international struggle against terrorism have forced financial institutions to know much more about their clients. Verifying clients' VAT status should thus be fairly simple. The paper also evaluates the economic impact of reform and finds that reform would significantly increase VAT revenues, while having little impact on overall welfare. Households would see an increase in the price of financial services but given the relatively high incomes of mortgage takers, the burden of the tax would be approximately proportional across income classes. Copyright (c) CEPR, CES, MSH, 2002.

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Bibliographic Info

Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 17 (2002)
Issue (Month): 35 (October)
Pages: 497-534

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Handle: RePEc:bla:ecpoli:v:17:y:2002:i:35:p:497-534

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Cited by:
  1. Harry Huizinga, 2004. "The Taxation of Banking in an Integrating Europe," International Tax and Public Finance, Springer, vol. 11(4), pages 551-568, 08.
  2. Zee, Howell H., 2005. "A New Approach to Taxing Financial Intermediation Services Under a Value–Added Tax," National Tax Journal, National Tax Association, vol. 58(1), pages 77-92, March Cit.
  3. Gunther Capelle-Blancard & Olena Havrylchyk, 2013. "The Ability of Banks to Shift Corporate Income Taxes to Customers," Working Papers 2013-09, CEPII research center.
  4. Stephan Schulmeister, 2009. "A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal," WIFO Working Papers 344, WIFO.
  5. Stephan Schulmeister, 2009. "A General Financial Transaction Tax: The Concept, its Justification and Effects," WIFO Working Papers 352, WIFO.
  6. José Sánchez Maldonado & Salvador Gómez Sala, 2006. "The Reform of Indirect Taxation in Spain: VAT and Excise," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0607, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  7. Gunther Capelle-Blancard & Olena Havrylchyk, 2013. "Incidence of Bank Levy and Bank Market Power," Working Papers 2013-21, CEPII research center.
  8. Beck, T.H.L. & Huizinga, H.P., 2011. "Taxing banks – here we go again!," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5046881, Tilburg University.
  9. Felix Bierbrauer, 2012. "On the Incidence of a Financial Transactions Tax in a Model with Fire Sales," CESifo Working Paper Series 3870, CESifo Group Munich.
  10. Thornton Matheson, 2012. "Security transaction taxes: issues and evidence," International Tax and Public Finance, Springer, vol. 19(6), pages 884-912, December.
  11. Huizinga, H.P., 2003. "Comment on 'European banking, past, present, and future'," Open Access publications from Tilburg University urn:nbn:nl:ui:12-148675, Tilburg University.
  12. Honohan, Patrick, 2003. "Avoiding the pitfalls in taxing financial intermediation," Policy Research Working Paper Series 3056, The World Bank.

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