New bank taxes: why and what will be the effects?

Devereux, Michael P. (2014)

Ruud de Mooij and Gaëtan Nicodème eds., Taxation and Regulation of the Financial Sector, Cambridge MA: MIT Press, Chapter 2. [2011]

Abstract

This paper analyses some options for the introduction of new taxes on the financial sector, and in particular analyses the Financial Activities Tax (FAT) and the Financial Services Contribution (FSC). The paper first summarizes briefly the origins of the recent financial crisis, then sets out possible objectives for financial sector taxes, in terms of the revenue-raising potential while minimizing distortions, or correcting negative externalities created by the financial sector. The FAT comes closest to raising revenue in a neutral way. The FSC is more attuned to the aim of inducing a more stable financial system by changing the behavior of banks. However, the FSC, like a minimum capital requirement, is independent of the risk of the bank’s assets, and it is likely that a bank would respond to a higher capital ratio by increasing the risk of its assets.

Keywords:   Bank taxation, Financial Activities Tax, Financial Services Contribution, Financial crisis, Pigouvian tax

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