Should transactions services be taxed at the same rate as consumption?

Lockwood, Ben and Yerushalmi, Erez (2014) Should transactions services be taxed at the same rate as consumption? Oxford University Centre for Business Taxation WP 14/23.

[img]
Preview
PDF
Download (397kB) | Preview

Abstract

This paper considers the optimal taxation of transactions services in a dynamic general equilibrium setting, where households use both cash and costly transactions services provided by banks to purchase consumption goods. With a full set of all tax instruments, the optimal tax structure is indeterminate. However, all optimal tax structures distort the relative costs of payment media, by raising the relative cost of deposits to cash. In the simplest optimal tax structure, the Friedman rule holds i.e. cash should be untaxed, and the rate of tax on transactions services can be higher or lower than the consumption tax. When parameters are calibrated to US data, simulations suggest that the transactions services tax should be considerably lower. This is because a transactions tax has a "double distortion": it distorts the choice between payment media, and indirectly taxes consumption. This contrasts with the special case of the cashless economy, when the first distortion is absent: in this case, it is optimal to tax transactions services at the same rate as consumption.

Item Type: Other Working Paper
Keywords: corporate taxation
Centre: Oxford University Centre for Business Taxation > CBT Working Papers
Date Deposited: 07 Aug 2015 15:49
Last Modified: 15 Oct 2015 02:18
Funders: Not applicable
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5431

View statistics

Actions (login required)

Edit View Edit View