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Efficiency and the taxation of bank profits

Author

Listed:
  • Robin Boadway

    (Queen’s University)

  • Motohiro Sato

    (Hitotsubashi University)

  • Jean-François Tremblay

    (University of Ottawa)

Abstract

We explore the effect of profit taxation and regulation of banks and other financial intermediaries in a setting in which intermediation is inefficient. The inefficiencies arise from imperfect screening of lenders, which tends to limit lending, and government provision of deposit insurance, which encourages excessive lending. An R+F cash-flow tax with and without full refundability of tax losses is applied to financial sector profits. As well, the government regulates the amount of lending financial intermediaries can do relative to their equity. With full refundability, the cash-flow tax is neutral and has no effect on existing distortions. The tax transfers rents to the government. If tax losses are not refunded in the event of bank insolvency, the tax discourages loans and the optimal tax rate is reduced. The optimal regulation of the loan–equity ratio of banks as a complementary policy instrument is characterized.

Suggested Citation

  • Robin Boadway & Motohiro Sato & Jean-François Tremblay, 2021. "Efficiency and the taxation of bank profits," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(1), pages 191-211, February.
    • Handle: RePEc:kap:itaxpf:v:28:y:2021:i:1:d:10.1007_s10797-020-09616-3
    DOI: 10.1007/s10797-020-09616-3
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Bank profit tax; Financial activities tax; R+F cash-flow tax;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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