Avoiding the Pitfalls in Taxing Financial Intermediation

24 Pages Posted: 20 Apr 2016

See all articles by Patrick Honohan

Patrick Honohan

Trinity College Dublin - Department of Economics; Peter G. Peterson Institute for International Economics; Centre for Economic Policy Research (CEPR)

Date Written: May 2003

Abstract

Enthusiasts for financial sector tax reform typically come either with some form of "flat tax" (including value added tax on financial services, zero taxation on capital income, or a universal transactions tax) or advocating corrective taxes designed to offset market failures or achieve other targeted objectives. As a result the tax systems in most countries often end up with a complex mixture. Honohan argues that practical policy for taxation of the financial sector needs to take into account two key features of the sector: Its capacity for arbitrage and its sensitivity to inflation and thus to nonindexed taxes. Where these aspects have been neglected, poorly constructed tax systems - whether the consequence of a drive for revenue or of misdirected sophistication - often have sizable unexpected side effects. A defensive stance making the minimization of such distortions as its cornerstone is the best policy.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to assess the role of taxation in financial sector development.

Suggested Citation

Honohan, Patrick, Avoiding the Pitfalls in Taxing Financial Intermediation (May 2003). World Bank Policy Research Working Paper No. 3056. Available at SSRN: https://ssrn.com/abstract=636418

Patrick Honohan (Contact Author)

Trinity College Dublin - Department of Economics ( email )

Dublin 2
Ireland

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

33 Great Sutton St,
Clerkenwell,
London, EC1V 0DX
United Kingdom

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