How Should Financial Intermediation Services be Taxed?

Ben Lockwood

No 270779, Economic Research Papers from University of Warwick - Department of Economics

Abstract: This paper considers the optimal taxation of savings intermediation and payment services in a dynamic general equilibrium setting, when the government can also use consumption and income taxes. When payment services are used in strict proportion to …nal consumption, and the cost of intermediation services is …xed and the same across …rms, the optimal taxes are generally indeterminate. But, when …rms di¤er exogenously in the cost of intermediation services, the tax on savings intermediation should be zero. Also, when household time and payment services are substitutes in transactions, the optimal tax rate on payment services is determined by the returns to scale in the conditional demand for payment services, and is generally di¤erent to the optimal rate on consumption goods. In particular, with constant returns to scale, payment services should be untaxed. These results can be understood as applications of the Diamond-Mirrlees production e¢ciency theorem. Finally, as an extension, we endogenize intermediation, in the form of monitoring, and show that it may be oversupplied in equilibrium when banks have monopoly power, justifying a Pigouvian tax in this case.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 29
Date: 2010-10-23
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Citations: View citations in EconPapers (12)

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Related works:
Working Paper: How should financial intermediation services be taxed? (2013)
Working Paper: How Should Financial Intermediation Services be Taxed? (2011)
Working Paper: How Should Financial Intermediation Services be Taxed? (2010)
Working Paper: How should Financial Intermediation Services be Taxed? (2010)
Working Paper: How Should Financial Intermediation Services be Taxed? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:270779

DOI: 10.22004/ag.econ.270779

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