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Avoiding the pitfalls in taxing financial intermediation

  • Honohan, Patrick

Enthusiasts for financial sector tax reform typically come either with some form of"flat tax"(including value added tax on financial services, zero taxation on capital income, or a universal transactions tax) or advocating corrective taxes designed to offset market failures or achieve other targeted objectives. As a result the tax systems in most countries often end up with a complex mixture. Honohan argues that practical policy for taxation of the financial sector needs to take into account two key features of the sector: its capacity for arbitrage and its sensitivity to inflation and thus to nonindexed taxes. Where these aspects have been neglected, poorly constructed tax systems-whether the consequence of a drive for revenue or of misdirected sophistication-often have sizable unexpected side effects. A defensive stance making the minimization of such distortions as its cornerstone is the best policy.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3056.

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Date of creation: 31 May 2003
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Handle: RePEc:wbk:wbrwps:3056
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  1. Corvoisier, Sandrine & Gropp, Reint, 2001. "Bank Concentration and Retail Interest Rates," Working Paper Series 0072, European Central Bank.
  2. Patrick Honohan, 2003. "Alternative Approaches to Taxing the Financial Sector: Which is Best and Where Does Chile Stand?," Working Papers Central Bank of Chile 225, Central Bank of Chile.
  3. Demirguc-Kunt, Asl' & Kane, Edward J., 2001. "Depositinsurance around the globe : where does it work?," Policy Research Working Paper Series 2679, The World Bank.
  4. Martin S. Feldstein, 1999. "Capital Income Taxes and the Benefit of Price Stability," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 9-46 National Bureau of Economic Research, Inc.
  5. Richard K. Lyons, 2006. "The Microstructure Approach to Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 026262205x, June.
  6. H. Huizinga & Ga�tan Nicod�me, 2001. "Are international deposits tax-driven?," European Economy - Economic Papers 152, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  7. Tullio Jappelli & Luigi Pistaferri, 2002. "Tax Incentives for Household Saving and Borrowing," CSEF Working Papers 83, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  8. Harry Huizinga, 2002. "A European VAT on financial services?," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 497-534, October.
  9. Laeven, Luc, 2002. "Pricing of deposit insurance," Policy Research Working Paper Series 2871, The World Bank.
  10. Cull, Robert & Senbet, Lemma W. & Sorge, Marco, 2001. "Deposit insurance and financial development," Policy Research Working Paper Series 2682, The World Bank.
  11. Douglas W. Diamond, 1996. "Financial intermediation as delegated monitoring: a simple example," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 51-66.
  12. Alain Laurin & Giovanni Majnoni, 2003. "Bank Loan Classification and Provisioning Practices in Selected Developed and Emerging Countries," World Bank Publications, The World Bank, number 15157, September.
  13. Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
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