Who Consumes the Credit Union Tax Subsidy?

54 Pages Posted: 2 Aug 2019 Last revised: 9 Aug 2019

See all articles by Robert DeYoung

Robert DeYoung

University of Kansas School of Business

John Goddard

Bangor Business School

Donal G. McKillop

Queen's University Management School

John O. S. Wilson

University of St. Andrews

Date Written: July 10, 2019

Abstract

Credit unions are exempt from paying income taxes, and these tax savings are supposed to subsidize the provision of financial services to credit union members. In this paper, we investigate whether the entire credit union tax subsidy is being passed along to credit union members — in the form of increased quantities of financial services and/or better-than-market interest rates — or whether some of the credit union tax subsidy is being consumed by inefficient credit union operations. We estimate a structural model of profit inefficiency for US commercial banks between 2005 through 2017, and use the estimated parameters to evaluate the relative performance of US credit unions and commercial banks. When inputs and outputs are valued in terms of market prices, profit inefficiencies at credit unions exceed those at similar commercial banks by an economically significant order. About half of this inefficiency gap can be attributed to legally mandated credit union activities — such as producing loans and issuing deposits — while the remainder can be attributed to operational inefficiencies at credit unions relative to banks. When inputs and outputs are valued in terms of the prices that credit unions actually pay, our results suggest that over nine-tenths of the tax subsidy is simply passed through to credit union members in the form of higher deposit interest rates.

Keywords: commercial banks, credit unions, profit inefficiency, tax exempt status

JEL Classification: G21, G28

Suggested Citation

DeYoung, Robert and Goddard, John and McKillop, Donal G. and Wilson, John O. S., Who Consumes the Credit Union Tax Subsidy? (July 10, 2019). QMS Research Paper 2019/08. Available at SSRN: https://ssrn.com/abstract=3429208 or http://dx.doi.org/10.2139/ssrn.3429208

Robert DeYoung (Contact Author)

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

John Goddard

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

Donal G. McKillop

Queen's University Management School ( email )

25 University Square
Belfast, Northern Ireland BT7 1NN
Northern Ireland

John O. S. Wilson

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
39
Abstract Views
319
PlumX Metrics