Bank Profitability and Taxation

38 Pages Posted: 17 Dec 2007

See all articles by Ugo Albertazzi

Ugo Albertazzi

ECB -DG Monetary Policy

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Date Written: November 2007

Abstract

This paper investigates how bank profitability is affected by corporate income tax (CIT) using aggregate data on the banking sector of the main industrialized countries for the period 1981-2003. Two main novelties emerge with respect to the existing literature. First, the paper explicitly considers that CIT is not specific to the banking sector, so that changes in the CIT rate can affect both banks and borrowing firms' behavior. Thus, with the help of a simple theoretical model we derive a set of predictions about the impact of CIT on banks' income statement. Second, by considering all the main components of banks' profit and loss accounts, we are able to test such predictions and to disentangle the extent to which a bank is able to shift its tax-burden onto its borrowers, depositors, and purchasers of fee-generating services. It turns out that CIT has a substantial impact on the composition of banking sector revenues but cannot explain large differences in the level of profitability across countries.

Keywords: tax-shifting, corporate income tax, bank profitability

JEL Classification: C53, G20, G21

Suggested Citation

Albertazzi, Ugo and Gambacorta, Leonardo, Bank Profitability and Taxation (November 2007). Bank of Italy Temi di Discussione (Working Paper) No. 649. Available at SSRN: https://ssrn.com/abstract=1075243 or http://dx.doi.org/10.2139/ssrn.1075243

Ugo Albertazzi

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
302
Abstract Views
1,470
rank
100,059
PlumX Metrics