On the Incidence of Deposit Taxes

Tarek S. Zaher and Dale K. Osborne

No 2008-WP-03, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: The incidence of deposit taxes has been connected to interesting questions in the theory of financial intermediation. Some researchers have found evidence supporting the notion that the deposits tax is borne by bank borrowers and that, therefore, bank loans are 'unique.' Other studies indicate that bank shareholders bear at least some deposit taxes. In this study, we test the hypothesis that shareholders bear a larger part of a given-sized tax on time deposits than on demand deposits. Our results indicate that reserve-requirement changes have strong effects on large banks' stock returns. The results also indicate that cuts in reserve requirements against time deposits induce proportionally higher abnormal returns than cuts in reserve requirements against demand deposits. We conclude that banks' shareholders bear less of the demand-deposit tax than of the time-deposit tax and that part of the demand-deposit tax falls on borrowers or demand depositors.

Keywords: Deposit tax; reserve requirement changes; uniqueness of bank loans; demand deposit tax; time deposit tax (search for similar items in EconPapers)
JEL-codes: G28 G29 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2008-04
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