UNSPECIFIED (1999) The tax treatment of financial intermediation. JOURNAL OF MONEY CREDIT AND BANKING, 31 (4). pp. 704-719. ISSN 0022-2879

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Abstract

Whether and how to tax financial intermediation services is unclear because individual preferences are not defined directly over financial services, but only over the goods that are consumed. Intermediation services facilitate consumption but do not directly provide utility. In this paper, we show how taxing goods alone (but not financial services) can be welfare preferred to taxing both goods and financial services on an equal-yield basis and at a lower rate in a general equilibrium model with transactions costs. This is consistent with Foley's (1970) and Hahn's (1971) well-known treatments of general equilibrium with transactions costs which suggest that the two fundamental theorems of welfare economics may not hold in such circumstances. Use of more intermediation services yields gains from trade, but reduces resources available for provision of other (consumption) goods. We explore the net effect first using a numerical example, and then using U.S. data, drawing out implications for policy.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance H Social Sciences > HC Economic History and Conditions
Journal or Publication Title:	JOURNAL OF MONEY CREDIT AND BANKING
Publisher:	OHIO STATE UNIV PRESS
ISSN:	0022-2879
Date:	November 1999
Volume:	31
Number:	4
Number of Pages:	16
Page Range:	pp. 704-719
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/14052

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