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Should transactions services be taxed at the same rate as consumption?
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Lockwood, Ben and Yerushalmi, Erez (2014) Should transactions services be taxed at the same rate as consumption? Working Paper. Oxford, UK: Oxford University Centre for Business Taxation. Working paper series (WP 14/23).
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Official URL: http://www.sbs.ox.ac.uk/ideas-impact/tax/publicati...
Abstract
This paper considers the optimal taxation of transactions services in a dynamic general equilibrium setting, where households use both cash and costly transactions services provided by banks to purchase consumption goods. With a full set of all tax instruments, the optimal tax structure is indeterminate. However, all optimal tax structures distort the relative costs of payment media, by raising the relative cost of deposits to cash. In the simplest optimal tax structure, the Friedman rule holds i.e. cash should be untaxed, and the rate of tax on transactions services can be higher or lower than the consumption tax. When parameters are calibrated to US data, simulations suggest that the transactions services tax should be considerably lower. This is because a transactions tax has a "double distortion": it distorts the choice between payment media, and indirectly taxes consumption. This contrasts with the special case of the cashless economy, when the first distortion is absent: in this case, it is optimal to tax transactions services at the same rate as consumption.
| Item Type: | Working or Discussion Paper (Working Paper) | ||||
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| Subjects: | H Social Sciences > HG Finance H Social Sciences > HJ Public Finance |
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| Divisions: | Faculty of Social Sciences > Economics Faculty of Social Sciences > Institute for Employment Research |
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| Library of Congress Subject Headings (LCSH): | Intermediation (Finance) -- Taxation, Banks and banking -- Taxation, Value-added tax | ||||
| Series Name: | Working paper series | ||||
| Publisher: | Oxford University Centre for Business Taxation | ||||
| Place of Publication: | Oxford, UK | ||||
| Official Date: | October 2014 | ||||
| Dates: |
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| Number: | WP 14/23 | ||||
| Number of Pages: | 29 | ||||
| Institution: | University of Warwick | ||||
| Status: | Not Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Open Access (Creative Commons) | ||||
| Funder: | Economic and Social Research Council (Great Britain) (ESRC) | ||||
| Grant number: | RES-060-25-0033 (ESRC) |
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