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Must Financial Services Be Taxed Under a Consumption Tax?

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  • Grubert, Harry
  • Mackie, James B. III

Abstract

The taxation of financial services used by households has been a stumbling block in designing consumption taxes. We present a theoretical case for exempting from tax investment services, loan services, and insurance services. These services are not consumption items. Instead, they represent the cost of smoothing consumption across time, as in the case of investment or loan services, and across states of nature, as in the case of insurance services. Since these services provide the funds used to purchase fully taxable consumption goods, these services should be expensed just as the cost of physical investment goods should be expensed.

Suggested Citation

  • Grubert, Harry & Mackie, James B. III, 2000. "Must Financial Services Be Taxed Under a Consumption Tax?," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(1), pages 23-40, March.
    • Handle: RePEc:ntj:journl:v:53:y:2000:i:1:p:23-40
    DOI: 10.17310/ntj.2000.1.02
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    References listed on IDEAS

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    1. Peter R. Merrill, 1997. "Taxation of Financial Services under a Consumption Tax," Books, American Enterprise Institute, number 51104, September.
    2. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "Introduction to "A General Equilibrium Model for Tax Policy Evaluation"," NBER Chapters, in: A General Equilibrium Model for Tax Policy Evaluation, pages 1-5, National Bureau of Economic Research, Inc.
    3. Chia, Ngee-Choon & Whalley, John, 1999. "The Tax Treatment of Financial Intermediation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 704-719, November.
    4. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-940, September.
    5. Ballard, Charles L. & Fullerton, Don & Shoven, John B. & Whalley, John, 2009. "A General Equilibrium Model for Tax Policy Evaluation," National Bureau of Economic Research Books, University of Chicago Press, number 9780226036335.
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    Cited by:

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    2. Chaudhry, Sajid Mukhtar & Mullineux, Andrew & Agarwal, Natasha, 2015. "Balancing the regulation and taxation of banking," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 38-52.
    3. Michael Firth & Kenneth McKenzie, 2012. "The GST and Financial Services: Pausing for Perspective," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 5(29), September.
    4. Vidar Christiansen, 2017. "Taxation of Insurance," CESifo Working Paper Series 6830, CESifo.
    5. Correa, Juan & Lorca, Miguel & Parro, Francisco, 2015. "Measuring the Impact of Financial Taxation on Capital," MPRA Paper 64378, University Library of Munich, Germany.
    6. Joel Slemrod & Tejaswi Velayudhan, 2022. "The VAT at 100: A Retrospective Survey and Agenda for Future Research," Public Finance Review, , vol. 50(1), pages 4-32, January.
    7. Vidar Christiansen, 2017. "Indirect Taxation of Financial Services," CESifo Working Paper Series 6675, CESifo.
    8. Ben Lockwood & Erez Yerushalmi, 2019. "How should payment services be taxed?," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 53(1), pages 21-47, June.
    9. Arkadiusz Bernal, 2012. "Zasadność zwolnienia usług pośrednictwa finansowego z podatku od wartości dodanej," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1-2, pages 117-133.
    10. Bernal, Arkadiusz, . "Zasadność zwolnienia usług pośrednictwa finansowego z podatku od wartości dodanej," Gospodarka Narodowa-The Polish Journal of Economics, Szkoła Główna Handlowa w Warszawie / SGH Warsaw School of Economics, vol. 2012(1-2).
    11. Presiana Nenkova & Angel Angelov, 2019. "Assessing the Effects of Imposing VAT on the Services Provided by the Banking Sector – The Case of Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 124-143.

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