Taxes, banks and financial stability

Publication: White Paper No. 6
Topic Area: Financial Institutions
Authors: Reint Gropp
Date: Aug 2013
Keywords: taxes, financial institutions, tax incidence, financial stability, tax revenues, bank incentives
Abstract:

In response to the financial crisis of 2008/2009, numerous new taxes on financial institutions have been discussed or implemented around the world. This paper discusses the connection between the incidence of the taxes, their incentive effects, and policy makers’ objectives. Combining basic insights from banking theory with standard models of tax incidence shows that the incidence of such taxes will disproportionately fall on small and medium size enterprises. The arguments presented suggest it is unlikely that the taxes will have a beneficial impact on financial stability or raise significant amounts of revenue without increasing the cost of capital to bank dependent firms significantly.

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