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How should financial intermediation services be taxed?

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  • Ben Lockwood

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    (CBT, CEPR and Department of Economics, University of Warwick)

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    Abstract

    This paper considers the optimal taxation of savings intermediation services in a dynamic general equilibrium setting, when the government can also use consumption, income and profit taxes. When 100% taxation of profit is available, taxes on services supplied to firms should be deductible from profit, implying the optimality of a VAT-type tax. As for the rate of tax, in the steady state, an optimal arrangement is to set it equal to the rate of tax on capital income, not consumption. In turn, the capital income tax is zero when the when an unrestricted profit tax is available, but in the more realistic case when such a tax is not available, this rate can be positive or negative, but generally different to the optimal rate of tax on consumption.

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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/Series_13/WP1309.pdf
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    Bibliographic Info

    Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1309.

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    Date of creation: 2013
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    Handle: RePEc:btx:wpaper:1309

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    Related research

    Keywords: financial intermediation services; tax design; banks; payment services;

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    1. Javier Bianchi & Enrique G. Mendoza, 2010. "Overborrowing, Financial Crises and 'Macro-prudential' Taxes," NBER Working Papers 16091, National Bureau of Economic Research, Inc.
    2. Jack, W., 1998. "The Treatment of Financial Services Under a Broad-Based Consumption Tax," CEPR Discussion Papers 394, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    3. Correia, Isabel H., 1996. "Should capital income be taxed in the steady state?," Journal of Public Economics, Elsevier, vol. 60(1), pages 147-151, April.
    4. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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