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The Treatment of Financial Services Under a Broad-Based Consumption Tax

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  • Jack, William

Abstract

This paper examines the appropriate taxation of financial services under a broad-based consumption tax. It is assumed that the underlying objective of the consumption tax is to maintain undistorted prices between current and future consumption (i.e., to impose no distortion on savings decisions), and, in a model with uncertainty, between consumption in different states of the world. It is argued that, in order to achieve such neutrality, proportional financial service charges, like interest rate spreads and insurance premium loadings, should be untaxed. On the other hand, identifiable fixed fees should be taxed. This is because, under the assumption that the size of the spread used to finance financial services is fixed, the price of such services automatically increases with the introduction of the consumption tax. Levying the tax on them explicitly would then increase their relative price, and impose an unwanted distortion.

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  • Jack, William, 2000. "The Treatment of Financial Services Under a Broad-Based Consumption Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(4), pages 841-852, December.
    • Handle: RePEc:ntj:journl:v:53:y:2000:i:4:p:841-52
    DOI: 10.17310/ntj.2000.4.03
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    File URL: https://doi.org/10.17310/ntj.2000.4.03
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    Cited by:

    1. Rafael Aigner & Felix Bierbrauer, 2015. "Boring Banks and Taxes," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2015_07, Max Planck Institute for Research on Collective Goods.
    2. Guillermo Peña, 2019. "Efficient treatment of banking services under VAT," Economics and Business Letters, Oviedo University Press, vol. 8(2), pages 115-121.
    3. Vidar Christiansen, 2017. "Taxation of Insurance," CESifo Working Paper Series 6830, CESifo.
    4. Correa, Juan & Lorca, Miguel & Parro, Francisco, 2015. "Measuring the Impact of Financial Taxation on Capital," MPRA Paper 64378, University Library of Munich, Germany.
    5. Fatih Yilmaz, "undated". "VAT Treatment of Financial Institutions: Implications for the Real Economy," Working Papers 2013-30, Department of Economics, University of Calgary, revised 02 Nov 2013.
    6. Ben Lockwood & Erez Yerushalmi, 2019. "How should payment services be taxed?," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 53(1), pages 21-47, June.
    7. Rousslang, Donald J., 2002. "Should Financial Services Be Taxed Under a Consumption Tax? Probably," National Tax Journal, National Tax Association;National Tax Journal, vol. 55(2), pages 281-291, June.
    8. Arkadiusz Bernal, 2012. "Zasadność zwolnienia usług pośrednictwa finansowego z podatku od wartości dodanej," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1-2, pages 117-133.
    9. Presiana Nenkova & Angel Angelov, 2019. "Assessing the Effects of Imposing VAT on the Services Provided by the Banking Sector – The Case of Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 124-143.

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