Taxation and Regulation of the Financial Sector

Taxation and Regulation of the Financial Sector

Ruud de Mooij
Gaëtan Nicodème
Copyright Date: 2014
Published by: MIT Press
Pages: 416
https://www.jstor.org/stable/j.ctt1287j27
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  • Book Info
    Taxation and Regulation of the Financial Sector
    Book Description:

    The global financial crisis has prompted economists to rethink fundamental questions on how governments should intervene in the financial sector. Many countries have already begun to reform the taxation and regulation of the financial sector -- in the United States, for example, the Dodd--Frank Act became law in 2010; in Europe, different countries have introduced additional taxes on the sector and made substantial progress toward a banking union for the eurozone. Only recently, however, has a new field in economics emerged to study the interplay between public finance and banking. This book offers the latest thinking on the topic by American and European economists. The contributors first explore new conceptual ground, offering rigorous theoretical analyses that help us better understand how tax policy and regulation can contribute to avoiding another crisis or reducing its impact. Contributors then investigate the behavior of financial institutions in response to various forms of taxation and regulation, offering empirical evidence that is vital for policy design.ContributorsThiess Buettner, Jin Cao, Giuseppina Cannas, Gunther Capelle-Blancard, Jessica Cariboni, Brian Coulter, Ernesto Crivelli, Ruud de Mooij, Michael P. Devereux, Katharina Erbe, Ricardo Fenochietto, Marco Petracco Giudici, Timothy J. Goodspeed, Reint Gropp, Olena Havyrlchyk, Michael Keen, Lawrence L. Kreicher, Julia Lendvai, Ben Lockwood, Massimo Marchesi, Donato Masciandaro, Colin Mayer, Robert N. McCauley, Patrick McGuire, Gaëtan Nicodème, Masanori Orihara, Francesco Passarelli, Carola Pessino, Rafal Raciborski, John Vickers, Lukas Vogel, Stefano Zedda

    eISBN: 978-0-262-32109-9
    Subjects: Business, Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Series Foreword
    (pp. vii-viii)

    This book is part of the CESifo Seminar Series. The series aims to cover topical policy issues in economics from a largely European perspective. The books in this series are the products of the papers and intensive debates that took place during the seminars hosted by CESifo, an international research network of renowned economists organized jointly by the Center for Economic Studies at Ludwig-Maximilians-Universität, Munich, and the Ifo Institute for Economic Research. All publications in this series have been carefully selected and refereed by members of the CESifo research network....

  4. 1 Taxation and Regulation of the Financial Sector
    (pp. 1-22)
    Ruud de Mooij and Gaëtan Nicodème

    After one year of a rampant subprime crisis, the financial sector experienced a near-collapse of its entire system in September 2008 when, after the nationalization of Fannie Mae and Freddie Mac,¹ three major US financial actors ran into deep troubles within three days. Confronted with unsolvable liquidity problems, Merrill Lynch had to be sold to Bank of America, Lehman Brothers filed for bankruptcy, and the insurer and credit default swap provider American International Group avoided a similar fate only thanks to a large loan from the Federal Reserve. Faced with uncertainties about the liquidity and solvency of other financial companies,...

  5. I Interplay of Taxation and Regulation Policies for the Financial Sector
    • 2 New Bank Taxes: Why and What Will Be the Effects?
      (pp. 25-54)
      Michael P. Devereux

      Since the beginning of the financial crisis numerous proposals have been made for new or increased taxes on banks and other financial companies. Many governments have individually taken action, and several official international bodies, including the IMF and the European Commission, have also been active in considering reform.¹ This chapter analyses some of the options for the taxation of banks and other financial companies that have been discussed, proposed and in some cases, enacted.

      A starting point is to consider the objectives for new taxes on banks. The European Commission raised three possible objectives.

      The first is that “taxes could...

    • 3 Taxes, Banks, and Financial Stability
      (pp. 55-66)
      Reint Gropp

      In the response to the financial crisis and its aftermath, in many countries numerous different “fees,” “taxes,” or “levies” on financial institutions have been discussed or implemented. The main objective of this chapter is to draw attention to the connection between the incidence of the taxes, namely who ultimately pays; the incentives for financial institutions based on the incidence of the tax; and what policy makers are trying to accomplish by imposing these taxes. I argue that combining banking theory with standard models of tax incidence can provide us with insight as to the desirability of such taxes. While I...

    • 4 Taxation and Regulation of Banks to Manage Systemic Risk
      (pp. 67-88)
      Brian Coulter, Colin Mayer and John Vickers

      The systemic costs of bank failures are typically addressed by capital regulation rather than taxation. This contrasts with other externalities, where taxation is generally viewed as the least distortionary intervention. In the wake of the financial crisis, there has been extensive discussion about taxation to address systemic externalities in banking. This chapter argues that these proposals may have shortcomings and that the conventional preference for capital regulation over taxation has a sound underlying rationale.

      The first reason for this is that approaches to externalities involving the principle that “polluters should pay” are imperfectly applicable to bank failures. At first sight,...

    • 5 Insolvency Uncertainty, Banking Tax, and Macroprudential Regulation
      (pp. 89-114)
      Jin Cao

      This chapter aims to discuss the role of banking tax, jointly with the other macroprudential policies in maintaining financial stability under the uncertainty between systemic liquidity and solvency shocks. First, I present the systemic risk that arises from two major problems in banking, illiquidity and insolvency problems. Then I show why conventional, one-handed regulatory policies fail to maintain financial stability under illiquidity and insolvency uncertainty, and how (or whether) banking tax helps restore constrained efficiency jointly with the other regulatory tools.

      Illiquidity and insolvency are two major risks in banking. Illiquidity means that one financial institution is not able to...

    • 6 The Political Economy of Containing Financial Systemic Risk
      (pp. 115-130)
      Donato Masciandaro and Francesco Passarelli

      The instability phenomenon represented by the financial system risk can be considered as a peculiar case of externality resulting from contagion effects (e.g., Acharya et al. 2007). The policy maker can enforce ad hoc regulation, directly limiting the possibility to trade toxic instruments or to build up high systemic risk portfolios (Claessens et al. 2010; Jeanne and Korinek 2010). Alternatively, taxation is an effective policy to curb systemic risk because it lowers the difference between private and social cost of systemic risk.

      John Maynard Keynes (1936) can be considered the former proponent of systemic risk taxation, although he identified the...

  6. II Design of Taxes and Regulation for the Financial Sector
    • 7 How Should Financial Intermediation Services Be Taxed?
      (pp. 133-156)
      Ben Lockwood

      Financial intermediation services comprise a significant and growing part of the national economy. For example, financial intermediation services as conventionally defined in the national accounts include activities such as the taking of deposits and the granting of credit, financial leasing, investment in securities and properties by financial intermediaries, insurance and pension funding, and services ancillary to financial intermediation.¹ The EU KLEMS database shows that this sector comprised 6.5 percent of national output in the United Kingdom in 1997, increasing to 7.9 percent by 2007. The figures for the United States, using the same definition of financial intermediation services, are 7.3...

    • 8 FAT or VAT? The Financial Activities Tax as a Substitute to Imposing Value-Added Tax on Financial Services
      (pp. 157-176)
      Thiess Buettner and Katharina Erbe

      In the aftermath of the financial crises, interest in the taxation of the financial sector has been renewed. One issue that has continuously attracted the attention is the value-added tax (VAT) exemption of financial services, which is widely applied. The empirical literature has pointed at substantial revenue gains that a repeal of the VAT exemption might generate (Genser and Winker 1997; Huizinga 2002) and also the recent Mirrlees report notes the revenue potential (Mirrlees et al. 2011). Recent research has reconsidered the empirical evidence and found weaker revenue gains (Buettner and Erbe 2013) or even revenue losses (Lockwood 2011). Besides...

    • 9 Assessing the Macroeconomic Impact of Financial Transaction Taxes
      (pp. 177-202)
      Julia Lendvai, Rafal Raciborski and Lukas Vogel

      The banking and financial crisis of recent years has led to a broad debate on financial regulation to improve the resilience of the financial sector and reduce the likelihood of further crises. Given the costs that rescuing financial institutions has inflicted on taxpayers, the call for a contribution from the financial sector to the financing of crisis-intervention costs has also gained political voice and support (e.g., IMF 2010; Matheson 2011). Hence common objectives behind proposals to strengthen financial sector taxation are to recover part of the budgetary costs of the financial crisis from the financial sector, to charge the financial...

    • 10 Financial Activities Taxes, Bank Levies, and Systemic Risk
      (pp. 203-226)
      Giuseppina Cannas, Jessica Cariboni, Massimo Marchesi, Gaëtan Nicodème, Marco Petracco Giudici and Stefano Zedda

      In the run-up and in the wake of 2007 financial crisis, the question of additional taxes on the financial sector taxation has been debated in academic and policy circles “as to how the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system” (IMF 2010). One of the drivers of this debate was the fact that the financial sector might be undertaxed, at least in the European Union, thanks to its compulsory exemption to value-added taxation (VAT).¹

      Among the various proposals, the introduction of a tax on...

  7. III Evidence on the Efficacy of Taxation and Regulation
    • 11 Taxation, Bank Leverage, and Financial Crises
      (pp. 229-252)
      Ruud de Mooij, Michael Keen and Masanori Orihara

      The onset of the financial crisis of 2008 quickly prompted many assessments of the role that taxation might have played in its onset and impact.¹ Their consensus was clear, but vague: tax distortions did not trigger the crisis but might have increased vulnerability to financial crises. Prominent among the reasons given for this was “debt bias”: the tendency toward excess leverage induced, in almost all countries, by the deductibility against corporate taxation of interest payments but not of the return to equity.² In encouraging firms to finance themselves by debt rather than equity, governments might have made them more vulnerable...

    • 12 The Ability of Banks to Shift Corporate Income Taxes to Customers
      (pp. 253-278)
      Gunther Capelle-Blancard and Olena Havrylchyk

      The recent financial crisis has given rise to intense discussions about the costs and merits of bank taxation (International Monetary Fund 2010; European Commission 2010 , 2012a, 2012b). In light of this debate, several EU countries (Austria, France, Germany, Hungary, Sweden, United Kingdom, etc.) have introduced fees and taxes that vary according to their base and purpose. Regardless of the tax purpose, one of the most important questions is the tax incidence: who bears the effective burden? Imposing a tax on banks does not mean that banks will ultimately pay because, a priori, banks could pass on the burden of...

    • 13 The Incidence of Bank Regulations and Taxes on Wages: Evidence from US States
      (pp. 279-310)
      Timothy J. Goodspeed

      This chapter focuses on two questions. First, I ask whether there is an earnings premium in the financial sector. Next, I examine the issue of tax and regulatory incidence by estimating the degree to which banking regulations and company taxes on banks influence wages in the banking sector.

      To do this, I examine data on wages gathered at the individual level from the Integrated Public Use Microdata Series (IPUMS). The US part of this database consists of more than fifty high-precision samples of the American population drawn from fifteen federal censuses and from the American Community Surveys of 2000 to...

    • 14 Impact of the Bank Transactions Tax on Deposits in Argentina
      (pp. 311-332)
      Ricardo Fenochietto, Carola Pessino and Ernesto Crivelli

      This chapter analyses the impact of the bank transactions tax (BTT) on financial intermediation in Argentina. A tax on transactions from savings and checking accounts (CSP) was established in March 2001 due to the economic crisis. The initial tax rate was 0.25 percent on debits and credits (a total of 0.5 percent), but it was increased twice over the course of the year, first to 0.4 percent and finally to 0.6 percent (a total of 1.2 percent). After the crisis passed, the tax was maintained at the 0.6 percent nominal rate, and only partial credits against other taxes (income tax...

    • 15 The 2011 FDIC Assessment on Banks’ Managed Liabilities: Interest Rate and Balance-Sheet Responses
      (pp. 333-370)
      Lawrence L. Kreicher, Robert N. McCauley and Patrick McGuire

      The global financial crisis led to a variety of proposals to levy taxes on the financial sector (Alworth and Arachi 2012; Hemmelgarn and Nicodème 2012; Lloyd 2012). Some proposedcorrective or Pigoviantaxes that would raise the private cost of financial choices that impose broader social costs. By analogy, economists have long proposed to curb air pollution efficiently by imposing taxes that make the polluter pay the social costs of sulfur emissions (Schultze 1977 ). In addition to regulating banks to limit leverage or dependence on short-term funding, the government could tax borrowing or short-term debt (Masciandaro and Passarelli 2012)....

  8. Contributors
    (pp. 371-374)
  9. Index
    (pp. 375-408)