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How should Financial Intermediation Services be Taxed?


  • Benjamin Lockwood


This paper considers the optimal taxation of savings intermediation and payment services in a dynamic general equilibrium setting, when the government can also use consumption and income taxes. When payment services are used in strict proportion to final consumption, and the cost of intermediation services is fixed and the same across firms, the optimal taxes are generally indeterminate. But, when firms differ exogenously in the cost of intermediation services, the tax on savings intermediation should be zero. Also, when household time and payment services are substitutes in transactions, the optimal tax rate on payment services is determined by the returns to scale in the conditional demand for payment services, and is generally different to the optimal rate on consumption goods. In particular, with constant returns to scale, payment services should be untaxed. These results can be understood as applications of the Diamond-Mirrlees production efficiency theorem. Finally, as an extension, we endogenize intermediation, in the form of monitoring, and show that it may be oversupplied in equilibrium when banks have monopoly power, justifying a Pigouvian tax in this case.

Suggested Citation

  • Benjamin Lockwood, 2010. "How should Financial Intermediation Services be Taxed?," CESifo Working Paper Series 3226, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3226

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    References listed on IDEAS

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    16. Poddar, Satya & English, Morley, 1997. "Taxation of Financial Services Under a Value-Added Tax: Applying the Cash-Flow Approach," National Tax Journal, National Tax Association, vol. 50(1), pages 89-111, March.
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    Cited by:

    1. Giancarlo Corsetti & Michael P. Devereux & John Hassler & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2011. "Chapter 5: Taxation and Regulation of the Financial Sector," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 147-169, February.
    2. International Monetary Fund, 2012. "Italy; Technical Assistance Report--The Delega Fiscale and the Strategic Orientation of Tax Reform," IMF Staff Country Reports 12/280, International Monetary Fund.
    3. Masciandaro, Donato & Passarelli, Francesco, 2013. "Financial systemic risk: Taxation or regulation?," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 587-596.
    4. 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.
    5. Felix Bierbrauer, 2013. "Financial Transaction Taxes and Fire Sales," 2013 Meeting Papers 433, Society for Economic Dynamics.
    6. Bierbrauer, Felix, 2014. "Tax incidence for fragile financial markets," Journal of Public Economics, Elsevier, vol. 120(C), pages 107-125.
    7. Matthew Schurin, 2012. "Optimal Fiscal Policy and the Banking Sector," Working papers 2012-40, University of Connecticut, Department of Economics, revised Jul 2013.

    More about this item


    financial intermediation services; tax design; banks; monitoring; payment services;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies


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