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Raising revenue with transaction taxes in Latin america - or is it better to tax with the devil you know?

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  • Suescun, Rodrigo

Abstract

In recent years, various Latin American governments have resorted to taxes on bank debits and financial transactions as alternative ways of raising revenue. Considerable interest has developed in understanding the consequences of such reforms. The author constructs a dynamic general equilibrium model to assess the size of distortions and other quantitative implications associated with a transaction tax. The distinctive feature of the model is the non-neutrality property of the tax in the sense that it distorts the structure of relative prices of intermediate transactions, giving rise to tax"pyramidation."The effective tax rate ultimately borne by the economy is shown to depend on the complexity of the transaction structure. Calibrated for Latin America, the model finds that, contrary to existing evidence and conventional wisdom, a transaction tax is not a particularly burdensome levy in terms of economic growth and efficiency costs. The model also shows that if a government can credibly commit itself to an announced two-step reform in which it first uses a transaction tax temporarily and then replaces it with any other conventional tax, this policy will improve economic welfare relative to a tax reform where a consumption tax (or a labor income tax or a capital earnings tax) is exclusively used from the start to raise the required additional revenue.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3279.

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Date of creation: 01 Apr 2004
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Handle: RePEc:wbk:wbrwps:3279

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Keywords: Public Sector Economics&Finance; Economic Theory&Research; Labor Policies; Environmental Economics&Policies; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; Public Sector Economics&Finance; Banks&Banking Reform; Economic Growth;

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  1. Cooley, T.F. & Hansen, G.D., 1991. "Tax Distortions in a Neoclassical Monetary Economy," RCER Working Papers 265, University of Rochester - Center for Economic Research (RCER).
  2. Fabio Kanczuk, 2002. "Juros Reais e Ciclos Reais Brasileiros," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 56(2), pages 249-267, April.
  3. Ortigueira, Salvador, 1998. "Fiscal policy in an endogenous growth model with human capital accumulation," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 323-355, July.
  4. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  5. Sato, Kazuo, 1976. "The Meaning and Measurement of the Real Value Added Index," The Review of Economics and Statistics, MIT Press, vol. 58(4), pages 434-42, November.
  6. Adolfo Sachsida & Roberto de Góes Ellery Junior & Victor Gomes, 2002. "Business Cycle Fluctuations in Brazil," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 56(2), pages 269-308, April.
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Cited by:
  1. Victor Duarte Lledo, 2005. "Tax Systems Under Fiscal Adjustment," IMF Working Papers 05/142, International Monetary Fund.

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