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The Incidence of Bank Regulations and Taxes on Wages: Evidence from US States

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  • Timothy J. Goodspeed

Abstract

Banks and the financial sector have come under increased scrutiny since the 2008 financial crisis. Regulations concerning the banking sector have been re-written and there have been calls for increased taxation of banks (as companies) and the remuneration of bankers. In general, two sorts of taxes are commonly mentioned, taxes on the profits of banks and taxes on bank wages. As the corporate tax may be borne by labor, a natural question to ask is whether the economic incidence of these taxes really differs. The cost of regulations can also be passed on, but public finance economists typically ignore the incidence of regulations, a potentially important source of influence for banks. This paper focusses on two questions. First, we ask whether there is an earnings premium in the financial sector. Second, we examine the issue of tax and regulatory incidence by estimating the degree to which banking regulations and company taxes on banks influence wages in the banking sector. We use individual data on wages combined with data from US states on the states’ tax rates and timing of regulatory changes applied to financial corporations. We find (i) a raw 45% earnings premium in the financial sector; (ii) a negative effect of corporate tax on wages in the manufacturing sector but a positive or no effect on wages in the banking sector, and (iii) lower wages in the banking sector in states that de-regulated earlier. The tax incidence result is somewhat surprising though it is consistent with Huizinga, Voget, and Wagner (2011), who find that home country corporate income taxation of foreign-source bank income is almost fully passed through to higher interest margins charged abroad. The result may have to do with specifics of the banking industry such as market power, labor mobility, or inelastic demand and elastic supply of banking services.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4026.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4026

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  1. Alison Felix & James R. Hines, Jr., 2009. "Corporate taxes and union wages in the United States," Regional Research Working Paper RRWP 09-02, Federal Reserve Bank of Kansas City.
  2. Harry Huizinga & Johannes Voget & Wolf Wagner, 2012. "International Taxation and Cross-Border Banking," Working Papers 1225, Oxford University Centre for Business Taxation.
  3. William F. Fox & Harold A. Black, 1994. "The Influence of State Taxation and Regulation On Selected Bank Activities," Public Finance Review, , vol. 22(3), pages 267-290, July.
  4. Sylla, Richard & Legler, John B. & Wallis, John J., 1987. "Banks and State Public Finance in the New Republic: The United States, 1790–1860," The Journal of Economic History, Cambridge University Press, vol. 47(02), pages 391-403, June.
  5. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
  6. R. Alison Felix, 2007. "Passing the burden: corporate tax incidence in open economies," Regional Research Working Paper RRWP 07-01, Federal Reserve Bank of Kansas City.
  7. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August.
  8. Li Liu & Rosanne Altshuler, 2011. "Measuring the burden of the corporate income tax under imperfect competition," Working Papers 1105, Oxford University Centre for Business Taxation.
  9. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  10. Thomas Philippon & Ariell Reshef, 2009. "Wages and Human Capital in the U.S. Financial Industry: 1909-2006," NBER Working Papers 14644, National Bureau of Economic Research, Inc.
  11. R. Alison Felix, 2009. "Do state corporate income taxes reduce wages?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 77-102.
  12. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
  13. Randall S. Kroszner & Philip E. Strahan, 1999. "What Drives Deregulation? Economics And Politics Of The Relaxation Of Bank Branching Restrictions," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1437-1467, November.
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