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A European VAT on financial services?

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  • Harry Huizinga

Abstract

EU financial services are exempted of VAT for technical reasons. This paper argues that the changed nature of bank-client relationships and advances in information technology have opened the door to a practical way of redressing this exemption. The proposed solution is to charge the regular VAT on services supplied to households, but no VAT on those supplied to businesses, while allowing financial institutions the normal VAT credit for all of their purchased inputs. Financial services would, as a result, be priced differently for households and businesses so banks would have to verify their customers' VAT status. While this may be burdensome, the OECD-wide fight against tax evasion and the international struggle against terrorism have forced financial institutions to know much more about their clients. Verifying clients' VAT status should thus be fairly simple. The paper also evaluates the economic impact of reform and finds that reform would significantly increase VAT revenues, while having little impact on overall welfare. Households would see an increase in the price of financial services but given the relatively high incomes of mortgage takers, the burden of the tax would be approximately proportional across income classes. Copyright (c) CEPR, CES, MSH, 2002.

Suggested Citation

  • Harry Huizinga, 2002. "A European VAT on financial services?," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 497-534, October.
  • Handle: RePEc:bla:ecpoli:v:17:y:2002:i:35:p:497-534
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    Cited by:

    1. Zee, Howell H., 2005. "A New Approach to Taxing Financial Intermediation Services Under a Value–Added Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 58(1), pages 77-92, March.
    2. Beck, T.H.L. & Huizinga, H.P., 2011. "Taxing banks – here we go again!," Other publications TiSEM b9fee45d-b09d-458f-9354-1, Tilburg University, School of Economics and Management.
    3. Harry Huizinga, 2004. "The Taxation of Banking in an Integrating Europe," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(4), pages 551-568, August.
    4. Thiess Buettner & Katharina Erbe, 2014. "Revenue and welfare effects of financial sector VAT exemption," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(6), pages 1028-1050, December.
    5. Thornton Matheson, 2012. "Security transaction taxes: issues and evidence," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(6), pages 884-912, December.
    6. José Sánchez Maldonado & Salvador Gómez Sala, 2006. "The Reform of Indirect Taxation in Spain: VAT and Excise," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0607, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    7. Gunther Capelle-Blancard & Olena Havrylchyk, 2013. "The Ability of Banks to Shift Corporate Income Taxes to Customers," Working Papers 2013-09, CEPII research center.
    8. Bierbrauer, Felix, 2014. "Tax incidence for fragile financial markets," Journal of Public Economics, Elsevier, vol. 120(C), pages 107-125.
    9. Gunther Capelle-Blancard & Olena Havrylchyk, 2014. "The burden of bank taxation: corporate income tax vs. bank levy," Chapters,in: Taxing Banks Fairly, chapter 4, pages 73-89 Edward Elgar Publishing.
    10. Gunther Capelle-Blancard & Olena Havrylchyk, 2017. "Incidence of Bank Levy and Bank Market Power," Review of Finance, European Finance Association, vol. 21(3), pages 1023-1046.
    11. Sajid M. Chaudhry & Andrew W. Mullineux & Natasha Agarwal, 2015. "Balancing the Regulation and Taxation of Banking," Books, Edward Elgar Publishing, number 16668, April.
    12. Honohan, Patrick, 2003. "Avoiding the pitfalls in taxing financial intermediation," Policy Research Working Paper Series 3056, The World Bank.
    13. Stephan Schulmeister, 2009. "A General Financial Transaction Tax: The Concept, its Justification and Effects," WIFO Working Papers 352, WIFO.
    14. Thornton Matheson, 2011. "Taxing Financial Transactions; Issues and Evidence," IMF Working Papers 11/54, International Monetary Fund.
    15. Huizinga, H.P., 2003. "Comment on 'European banking, past, present, and future'," Other publications TiSEM c8499086-f8f7-4474-ab06-7, Tilburg University, School of Economics and Management.
    16. Stephan Schulmeister, 2009. "A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal," WIFO Working Papers 344, WIFO.
    17. Felix Bierbrauer, 2012. "On the Incidence of a Financial Transactions Tax in a Model with Fire Sales," CESifo Working Paper Series 3870, CESifo Group Munich.
    18. repec:clh:resear:v:5:y:2012:i:29 is not listed on IDEAS

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