Balancing the Regulation and Taxation of Banking

Balancing the Regulation and Taxation of Banking

Sajid M. Chaudhry, Andrew W. Mullineux and Natasha Agarwal

This concise book gives a unique overview of bank taxation as an alternative or a compliment to prudential regulation or non-revenue taxation. Existing bank taxation is reviewed with a view to eliminating distortions in the tax system, which have incentivized banks to engage in risky activities in the past. The authors analyse the taxation of financial instruments trading, as well as the taxation of banking products and services to gauge whether this could finance resolution mechanisms and also help to ensure the stability of banks.

Chapter 6: Taxation of financial instruments

Sajid M. Chaudhry, Andrew W. Mullineux and Natasha Agarwal

Subjects: economics and finance, financial economics and regulation, international economics, money and banking

Extract

The IMF (2010) argues that there may be reasons to consider additional, more permanent tax measures beyond a special bank levy. This is because the large fiscal, economic and social costs of financial crises, and implicit insurance by taxpayers, may require a contribution from the financial sector to general revenues beyond covering the fiscal costs of direct support. Moreover, taxes might have a role in correcting adverse externalities arising from the financial sector, such as the creation of systemic risks and excessive risk taking. Specifically, proposals include taxes on: short-term and/or foreign exchange borrowing; on high rates of return to offset any tendency for decision takers to attach too little weight to downside risks; and corrective taxes related to systemic risks and interconnectedness. The prevailing view is that receipts from these taxes would contribute to general revenue and that they need not equal the damage that they seek to limit or avert. Explicitly corrective taxes, on systemic risk for instance, would need to be considered in close coordination with regulatory charges to assure capital and liquidity adequacy. The remainder of this chapter focuses on two possible instruments directed largely to revenue generation, although in each case their behavioural, and hence potentially corrective or distortionary, impact cannot be ignored. From the beginning of the financial crisis, the design and implementation of an FTT have received much support from various circles of society, including the ‘occupy’ protesters, policy makers and academics.

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