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Taxation of financial assets in developing countries

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  • Chamley, Christophe
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    Abstract

    In developing countries, most financial assets in formal markets are deposits at financial institutions. This potentially important tax base could be taxed at a low administrative cost. When revenues of financial taxes are significant, implicit taxes dwarf explicit taxes. The author focuses on the implicit taxation of financial assets through seigniorage, reserve requirements, lending targets, and interest ceilings combined with inflation. The last instrument has often been overlooked, but it has generated more than a third of implicit revenues in some cases by lowering the cost of government borrowing. Tax revenues are difficult to measure because of regulations that prevent the use of market prices for computation and distort the meaning of some definitions. For some countries, the standard method of seigniorage grossly underestimates the revenue from financial taxation. The author discusses various sources of distortion but ignores potential impacts on the level of saving and the growth rate. Although taxes on financial assets have a low administrative cost, the excess burden that stems from the misallocation of resources is probably a much higher fraction of revenues than that of other taxes.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 651.

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    Date of creation: 30 Apr 1991
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    Handle: RePEc:wbk:wbrwps:651

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    Related research

    Keywords: Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Public Sector Economics&Finance; Municipal Financial Management;

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    Cited by:
    1. Andrés Erosa, 2000. "Financial Intermediation and Occupational Choice in Development," UWO Department of Economics Working Papers 20003, University of Western Ontario, Department of Economics.
    2. N Bose & J A Holman & K C Neanidis, 2005. "The Optimal Public Expenditure Financing Policy: Does the Level of Economic Development Matter?," Centre for Growth and Business Cycle Research Discussion Paper Series 57, Economics, The Univeristy of Manchester.
    3. Gollin, Douglas, 1995. "Do Taxes on Large Firms Impede Growth? Evidence from Ghana," Bulletins 7488, University of Minnesota, Economic Development Center.
    4. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).

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