The opposite effects of bank tax on the real economy

This paper aims to study the real effects of a bank tax in an economy with imperfect banking market. In this sense, we propose an extension of the financial accelerator model with bank capital channel, by introducing a tax on the banks’ profits. We note two opposite influences of the “bank tax” on the cost of financing for banks: i) a direct one, which corresponds to the tax shield channel and translates the impact of the “fiscal saving” on the cost of external finance for banks, and (ii) an indirect one, which comes from the reaction of the banks’ net worth to a fiscal change, corresponding to the bank capital channel manifestation. If the impact of the first one is easier to observe in the short-run, the second one is more powerful in the long-run. The external financing cost for banks then turns into higher financing cost for firms, reducing investment and output.