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The Ability of Banks to Shift Corporate Income Taxes to Customers

  • Gunther Capelle-Blancard
  • Olena Havrylchyk

In the context of the financial crisis, many projects of bank levies have emerged. Yet, there is very little evidence on the incidence of bank taxes and, hence, it is not clear who will bear the burden of the new taxes. In this paper, we investigate the ability of banks to shift corporate income taxes to their clients and we consider whether tax incidence is influenced by market competition and banks’ market power. Our sample consists of 1,411 European commercial banks over the period 1992-2008. To measure competition we rely on a large number of indicators, such as banks’ market share, the Herfindhal index, the Lerner index and the Panzar and Rosse h-statistic. We find that even in uncompetitive markets banks are not able to shift corporate income taxes to their customers. Our results contradict earlier papers that find a significant pass-through, and we argue that previous studies suffer either from endogeneity problems or from the wrong specification of the tax burden.

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Paper provided by CEPII research center in its series Working Papers with number 2013-09.

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Date of creation: Feb 2013
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Handle: RePEc:cii:cepidt:2013-09
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  2. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
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  4. Francisco Pérez García & Joaquín Maudos Villarroya & Juan Francisco Fernández de Guevara Radoselovics, 2002. "Market Power In European Banking Sectors," Working Papers. Serie EC 2002-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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  6. Claessens, Stijn & Laeven, Luc, 2003. "What drives bank competition? some international evidence," Policy Research Working Paper Series 3113, The World Bank.
  7. Albertazzi, Ugo & Gambacorta, Leonardo, 2010. "Bank profitability and taxation," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2801-2810, November.
  8. Claeys, Sophie & Vander Vennet, Rudi, 2008. "Determinants of bank interest margins in Central and Eastern Europe: A comparison with the West," Economic Systems, Elsevier, vol. 32(2), pages 197-216, June.
  9. Panzar, John C & Rosse, James N, 1987. "Testing for "Monopoly" Equilibrium," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 443-56, June.
  10. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  11. European Commission, 2010. "Financial Sector Taxation," Taxation Papers 25, Directorate General Taxation and Customs Union, European Commission.
  12. Harry Huizinga, 2002. "A European VAT on financial services?," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 497-534, October.
  13. Angelini, Paolo & Cetorelli, Nicola, 2003. " The Effects of Regulatory Reform on Competition in the Banking Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 663-84, October.
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