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The Tax Treatment of Financial Intermediation

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Author Info
Chia, Ngee-Choon
Whalley, John

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Abstract

Whether and how to tax financial intermediation services is unclear because individual preferences are not defined directly over financial services, but only over the goods that are consumed. Intermediation services facilitate consumption but do not directly provide utility. In this paper, we show how taxing goods alone (but not financial services) can be welfare preferred to taxing both goods and financial services on an equal-yield basis and at a lower rate in a general equilibrium model with transactions costs. This is consistent with Foley's (1970) and Hahn's (1971) well-known treatments of general equilibrium with transactions costs which suggest that the two fundamental theorems of welfare economics may not hold in such circumstances. Use of more intermediation services yields gains from trade, but reduces resources available for provision of other (consumption) goods. We explore the net effect first using a numerical example, and then using U.S. data, drawing out implications for policy.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 31 (1999)
Issue (Month): 4 (November)
Pages: 704-19
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Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:4:p:704-19

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Kenneth J. McKenzie, 2000. "Taxing Banks," Taxation Discussion Paper #1, ATAX, University of New South Wales. [Downloadable!]
  2. Alan J. Auerbach & Roger H. Gordon, 2002. "Taxation of Financial Services under a VAT," American Economic Review, American Economic Association, vol. 92(2), pages 411-416, May. [Downloadable!]
  3. Ramon Caminal, 2002. "Taxation of banks: A theoretical framework," UFAE and IAE Working Papers 525.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
  4. María Angélica Arbeláez Restrepo & Leonard E. Burman & Sandra Consuelo Zuluaga, 2002. "The bank debit tax in Colombia," WORKING PAPERS SERIES. DOCUMENTOS DE TRABAJO 003565, FEDESARROLLO. [Downloadable!]
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This page was last updated on 2009-10-15.

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