Macroeconomic Effects of Taxes on Banking

José Boscá, Rafael Domenech, Javier Ferri and Juan F Rubio-Ramirez

No eee2019-09, Studies on the Spanish Economy from FEDEA

Abstract: This paper evaluates the macroeconomic effects of taxes on banking in a small open economy in a currency union for three tax alternatives: an additional tax on profits, on deposits, and on loans. We propose a DSGE model with a rich detail of taxes and a banking sector and show that these three taxes are equivalent in their effects on macroeconomic variables. Banks react to higher taxes by increasing their markups and by transferring part of the fiscal cost to households and firms through higher interest rates on loans. The increase in government revenues comes at a cost of a long-run decrease of GDP, an increase in loans interest rates, and a reduction in the volume of credit, deposits and bank capital. Our simulation exercises show that the trade-off between government revenues and economic activity is well captured by a multiplier of GDP to ex post government revenue close to -0.9, which is virtually independent of the tax rate.

Date: 2019-04
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-mac and nep-pbe
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Working Paper: Macroeconomic Effects of Taxes on Banking (2019)
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