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How should payment services be taxed?

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  • Ben Lockwood

    (University of Warwick)

  • Erez Yerushalmi

    (Birmingham City University)

Abstract

This paper considers the design of taxes on real money balances and bank payment services, when realistically, the household can use either cash or a bank payment account for the purchase of different varieties of goods. These taxes, plus a consumption tax, fund a government revenue requirement. We find that generally, real money balances and bank transaction fees should be taxed, and at different rates, i.e. the tax system should not leave the choice of payment services undistorted. For a wide class of time transactions cost technologies, including the Baumol-Tobin case, fees should be taxed at a lower rate than real money balances, and the tax on real money balances should be positive. However, it is possible that fees should be subsidized. The rate of tax on fees has no simple relationship to the optimal consumption tax, and can be higher or lower. A Corlett-Hague type intuition for these results is also developed, which relies on the concept of a virtual time endowment.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:sochwe:v:53:y:2019:i:1:d:10.1007_s00355-019-01178-6
    DOI: 10.1007/s00355-019-01178-6
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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