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Bank profitability and taxation

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Author Info
Ugo Albertazzi () (Banca d'Italia)
Leonardo Gambacorta () (Banca d'Italia)

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Abstract

This paper investigates how bank profitability is affected by corporate income tax (CIT) using aggregate data on the banking sector of the main industrialized countries for the period 1981-2003. Two main novelties emerge with respect to the existing literature. First, the paper explicitly considers that CIT is not specific to the banking sector, so that changes in the CIT rate can affect both banks and borrowing firmsÂ’ behaviour. Thus, with the help of a simple theoretical model we derive a set of predictions about the impact of CIT on banksÂ’ income statement. Second, by considering all the main components of banksÂ’ profit and loss accounts, we are able to test such predictions and to disentangle the extent to which a bank is able to shift its tax-burden onto its borrowers, depositors, and purchasers of fee-generating services. It turns out that CIT has a substantial impact on the composition of banking sector revenues but cannot explain large differences in the level of profitability across countries.

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File URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td07/td649_07/td649/en_tema_649.pdf
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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 649.

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Date of creation: Nov 2007
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Handle: RePEc:bdi:wptemi:td_649_07

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Related research
Keywords: tax-shifting; corporate income tax; bank profitability;

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Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
G20 - Financial Economics - - Financial Institutions and Services - - - General
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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  1. Ugo Albertazzi & Leonardo Gambacorta, 2006. "Bank profitability and the business cycle," Temi di discussione (Economic working papers) 601, Bank of Italy, Economic Research Department. [Downloadable!]
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