Taxation and the Financial Sector
Douglas A. Shackelford
University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)
New York University School of Law
Joel B. Slemrod
University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)
June 1, 2010
NYU School of Law, Public Law Research Paper No. 10-30
NYU Law and Economics Research Paper No. 10-25
In the aftermath of the recent financial crisis, a variety of taxes on financial institutions have been proposed or enacted. These taxes’ justifications range from punishing those deemed to have caused or unduly profited from the crisis, to addressing the budgetary costs of the crisis, to better aligning banks’ and bank executives’ incentives in light of the broader social costs and benefits of their actions. Although there is a long-standing literature on corrective, or Pigouvian, taxation, most of it has been applied to environmental externalities, and the externalities that arise from the actions of financial institution are structurally different. This paper reviews the justifications for special taxes on financial institutions, and addresses what kinds of taxes are most likely to achieve the various stated objectives, which often are in conflict. It then critically assesses the principal such taxes that have been proposed or enacted to date: financial transactions taxes, bonus taxes, and taxes on firms in the financial sector that apply based on size, bank liabilities, or excess profits.
Number of Pages in PDF File: 29
Keywords: financial institutions, Pigouvian taxation, 2008 financial crisis, financial reform, financial transactions tax, financial activities tax, bonus taxes
JEL Classification: G20, G21, G28, H20, H21, H23, H25
Date posted: May 9, 2010 ; Last revised: September 22, 2012
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