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Taxing banks fairly

Listed author(s):
  • Mullineux, Andrew W.
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    There is no reason to continue to exempt financial services and products from Value Added Tax in the UK, and indeed elsewhere. Its introduction in the UK would help to precipitate the end of the iniquitous and inefficient ‘free banking’ system. Its demise should be enforced by a retail banking and insurance utility regulator that would assure that charges to customers reflect costs incurred by banks and thus eliminate the cross-subsidisation underpinning ‘free banking’. Further, the shareholders and senior bondholders of ‘too big to fail’ banks enjoy a guarantee from taxpayers which they are not paying for. This puts them at a competitive advantage in relation to smaller banks and exposes taxpayers to losses in crises. The big banks should thus pay regulatory and fiscal taxes commensurate with the insurance they enjoy and these taxes should be carefully calibrated so as not to overburden domestic banks relative to international competitors. The taxes paid should relate to a bank's risk exposure and the risks a bank poses to the financial system as a whole. The banks should thus contribute proportionately (with other taxpayers) to producing the Public Good, financial stability. The issue of the tax bias caused deductibility of interest, but not dividend payments, as business expense is also explored. To achieve equal treatment of debt and equity, deductibility could be extended to dividends, but the tendency toward over indebtedness might be curbed if tax deductibility of interest was eliminated, perhaps starting with banks!

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    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 25 (2012)
    Issue (Month): C ()
    Pages: 154-158

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    Handle: RePEc:eee:finana:v:25:y:2012:i:c:p:154-158
    DOI: 10.1016/j.irfa.2012.11.001
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    1. Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_42, Max Planck Institute for Research on Collective Goods.
    2. Andy Mullineux, 2006. "The corporate governance of banks," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 14(4), pages 375-382, November.
    3. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    4. Smith, Adam, 1776. "An Inquiry into the Nature and Causes of the Wealth of Nations," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number smith1776.
    5. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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