The Taxation and Regulation of Banks

Michael Keen

No 2011/206, IMF Working Papers from International Monetary Fund

Abstract: The financial crisis has prompted a reconsideration of the taxation of financial institutions, with practice outstripping principle: France, Germany, the United Kingdom and several other European countries have now introduced some form of bank tax, and the U.S. administration has revived its own proposal for such a charge. This paper considers the structure, appropriate rate, and revenue yield of corrective taxation of financial institutions addressed to two externalities, consequent on excessive risk-taking, prominent in the crisis: those that arise when such institutions are simply allowed to collapse, and those that arise when, to avoid the harm this would cause, their creditors are bailed out. It also asks whether corrective taxation or a regulatory capital requirement is the better way to address these concerns. The results suggest a potential role for taxing bank borrowing, perhaps as an adjunct to minimum capital requirements, at marginal rates that rise quite sharply at low capital ratios (but are likely lower when the government cannot commit to its bailout policy), reaching levels higher than those of the bank taxes so far adopted or proposed.

Keywords: WP; equity capital; progressive tax; public funds; Bank taxation; corrective taxation; bank failure; bailout externality; bank equity; ability bank; bank owner; bank capital; bailout subsidy; representative bank; fixed capital capital ratio; Capital adequacy requirements; Financial sector; Bank levy; Environmental taxes; Creditor bail-in; Europe (search for similar items in EconPapers)
Pages: 38
Date: 2011-08-01
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Citations: View citations in EconPapers (30)

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