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The Tax Treatment of Financial Intermediation

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  • Chia, Ngee-Choon
  • Whalley, John

Abstract

Whether and how to tax financial intermediation services is unclear because individual preferences are not defined directly over financial services, but only over the goods that are consumed. Intermediation services facilitate consumption but do not directly provide utility. In this paper, we show how taxing goods alone (but not financial services) can be welfare preferred to taxing both goods and financial services on an equal-yield basis and at a lower rate in a general equilibrium model with transactions costs. This is consistent with Foley's (1970) and Hahn's (1971) well-known treatments of general equilibrium with transactions costs which suggest that the two fundamental theorems of welfare economics may not hold in such circumstances. Use of more intermediation services yields gains from trade, but reduces resources available for provision of other (consumption) goods. We explore the net effect first using a numerical example, and then using U.S. data, drawing out implications for policy.

Suggested Citation

  • 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.
    • Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:4:p:704-19
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    Citations

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    Cited by:

    1. Ben Lockwood, 2010. "How Should Financial Intermediation Services be Taxed?," Working Papers 1014, Oxford University Centre for Business Taxation.
    2. Pierre Durand & Gaëtan Le Quang, 2020. "Banks to basics! Why banking regulation should focus on equity," EconomiX Working Papers 2020-2, University of Paris Nanterre, EconomiX.
    3. Rafael Aigner & Felix Bierbrauer, 2015. "Boring Banks and Taxes," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2015_07, Max Planck Institute for Research on Collective Goods.
    4. María Angélica Arbeláez Restrepo & Leonard E. Burman & Sandra Consuelo Zuluaga, 2004. "The bank debit tax in Colombia," Informes de Investigación 3565, Fedesarrollo.
    5. Grubert, Harry & Mackie, James B. III, 2000. "Must Financial Services be Taxed Under a Consumption Tax?," National Tax Journal, National Tax Association, vol. 53(n. 1), pages 23-40, March.
    6. António Antunes & Tiago Cavalcanti & Anne Villamil, 2010. "Intermediation Costs and Welfare," Centre for Growth and Business Cycle Research Discussion Paper Series 142, Economics, The University of Manchester.
    7. 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.
    8. Vidar Christiansen, 2017. "Taxation of Insurance," CESifo Working Paper Series 6830, CESifo.
    9. Fatih Yilmaz, "undated". "VAT Treatment of Financial Institutions: Implications for the Real Economy," Working Papers 2013-30, Department of Economics, University of Calgary, revised 02 Nov 2013.
    10. Ismail Baydur & Fatih Yilmaz, 2021. "VAT Treatment of the Financial Services: Implications for the Real Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(8), pages 2167-2200, December.
    11. Alan J. Auerbach & Roger H. Gordon, 2002. "Taxation of Financial Services under a VAT," American Economic Review, American Economic Association, vol. 92(2), pages 411-416, May.
    12. Alberto Carrasquilla & Arturo Galindo, 2002. "Efectos En Bienestar De La Represión Financiera," Documentos CEDE 2429, Universidad de los Andes, Facultad de Economía, CEDE.
    13. 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.
    14. Ramon Caminal, 2002. "Taxation of banks: A theoretical framework," UFAE and IAE Working Papers 525.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).

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