Taxation when Markets are not Competitive: Evidence from a Loan Tax

Felipe Brugués and Rebeca De Simone

No 13409, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: We study the interaction of market structure and tax-and-subsidy strategies utilizing pass-through estimates from the unexpected introduction of a loan tax in Ecuador, a quantitative model, and a comprehensive commercial-loan dataset. Our model generalizes bank competition theories, including Bertrand-Nash competition, credit rationing, and joint-maximization. While we find the loan tax is distortionary, neglecting the possibility of non-competitive lending inflates estimated tax deadweight loss by 80% because non-competitive banks internalize some of the burden. Conversely, subsidies are less effective in non-competitive settings. If competition were stronger, tax revenue would be 10% lower. The findings suggest that policymakers should consider market structure in tax-and-subsidy strategies.

Keywords: Banks; Government regulation of banks; Taxation and subsidies; market structure; firm strategy; market performance (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2024-02
New Economics Papers: this item is included in nep-ban, nep-com, nep-fdg and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:13409

DOI: 10.18235/0005548

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