BAD taxation: Disintermediation and illiquidity in a bank account debits tax model

Abstract

This paper uses a dynamic general equilibrium model to study the economic effects of bank account debits (BAD) taxation. Australia and various Latin American countries have levied or levy BAD taxes. Aspects such as financial disintermediation, market illiquidity, and impacts on dividend and interest rates are considered. Part of the BAD tax revenue may be fictitious, due to increased interest payments on government debt. The Brazilian BAD tax (CPMF) experience is evaluated. The empirical analysis confirms some theoretical predictions. Incidence base over GDP appears to be sensitive to the tax rate, possibly engendering a Laffer curve. The tax may also cause real interest rates to increase. Furthermore, the deadweight losses are relatively large, even if revenues are small. The theoretical and empirical results suggest that the BAD tax is not adequate for revenue collection.

Keywords

Bank account debits tax BAD tax Financial transactions Tax FTT Currency transaction tax CTT Automated payment transaction tax APT tax CPMF Disintermediation Illiquidity 

References

  1. Albuquerque, P. H. (2002). Os Impactos Econômicos da CPMF: Teoria e Evidência, in Finanças Públicas: VI Prêmio Tesouro Nacional—2001. Brasília: STN.Google Scholar
  2. Albuquerque, P. H., & Gouvea, S. (2005). Canaries and Vultures: A Quantitative History of Monetary Mismanagement in Brazil. Mimeo, Texas A&M International University, Laredo.Google Scholar
  3. Banerjee, A., Lumsdaine, R. L., & Stock, J. H. (1992). Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence. Journal of Business & Economic Statistics, 10, 271–287.CrossRefGoogle Scholar
  4. Coelho, I., Ebrill, L. and Summers, V. (2001). Bank Debit Taxes in Latin America: An Analysis of Recent Trends. IMF Working Paper 01/67.Google Scholar
  5. Colabella, P. R., & Coppinger, R. J. (1999). The Withdrawals Tax, St. John's University Global Institute for Taxation Papers. Jamaica, NY: St. John's University.Google Scholar
  6. Diamond, P. A., & Mirrlees, J. A. (1971). Optimal Taxation and Public Production I: Production Efficiency. American Economic Review, 61, 8–27.Google Scholar
  7. Eichengreen, B., Tobin, J., & Wyplosz, C. (1995). Two Cases for Sand in the Wheels of International Finance. Economic Journal, 105, 162–172.CrossRefGoogle Scholar
  8. Feige, E. L. (2000). Taxation for the 21st Century: The Automated Payment Transaction (APT) Tax. Economic Policy, 31, 473–511.CrossRefGoogle Scholar
  9. Frankel, J. A. (1996). How Well Do Foreign Exchange Markets Function: Might a Tobin Tax Help? In M. ul Haq, I. Kaul, and I. Grunberg (Eds.), The Tobin tax: Coping with Financial Volatility (pp. 41–81). Oxford: Oxford, University Press.Google Scholar
  10. Garber, P., & Taylor, M.P. (1995). Sand in the Wheels of Foreign Exchange Markets: A Sceptical Note. Economic Journal, 105, 173–180.CrossRefGoogle Scholar
  11. Habermeier, K., & Kirilenko, A. (2003). Securities Transaction Taxes and Financial Markets. In P. Honohan (Ed.), Taxation of Financial Intermediation: Theory and Practice for Emerging Economies (pp. 325–343). Oxford: Oxford University Press.Google Scholar
  12. Hakkio, C. S. (1994). Should We Throw Sand in the Gears of Financial Markets? Federal Reserve Bank of Kansas City Economic Review, 79, 17–30.Google Scholar
  13. Jones, C. M., & Seguin, P. J. (1997). Transaction Costs and Price Volatility: Evidence from Commission Deregulation. American Economic Review, 87, 728–737.Google Scholar
  14. Kirilenko, A., & Perry, V. (2004). On the Financial Disintermediation of Bank Transaction Taxes. Mimeo, International Monetary Fund, Washington.Google Scholar
  15. Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money. Cambridge: Cambridge University Press.Google Scholar
  16. Lastrapes, W. D., & Selgin, G. (1997). The Check Tax: Fiscal Folly and the Great Monetary Contraction, Journal of Economic History, 57, 859–878.CrossRefGoogle Scholar
  17. Schwert, G. W. (1989). Tests for Unit Roots: A Monte Carlo Investigation. Journal of Business & Economic Statistics, 7, 147–159.CrossRefGoogle Scholar
  18. Shome, P., & Stotsky, J. G. (1995). Financial transactions Taxes. IMF Working Paper 95/77.Google Scholar
  19. Stiglitz, J. E. (1989). Using Tax Policy to Curb Speculative Short-Term Trading. Journal of Financial Services Research, 3, 101–115.CrossRefGoogle Scholar
  20. Summers, L. H., & Summers, V. P. (1989). When Financial Markets Work Too Well: A Cautious Case for a Securities Transaction Tax. Journal of Financial Services Research, 3, 261–286.CrossRefGoogle Scholar
  21. Tanzi, V. (2003). Taxation Reform in Latin America in the Last Decade. In J. A. González (Ed.), Latin American macroeconomic reforms: The second stage (pp. 327–355), Chicago: University of Chicago Press.Google Scholar
  22. Tobin, J. (1978). A Proposal for International Monetary Reform. Eastern Economic Journal, 4, 153–159.Google Scholar
  23. Umlauf, S. R. (1993). Transaction Taxes and the Behavior of the Swedish Stock Market. Journal of Financial Economics, 33, 227–240.CrossRefGoogle Scholar
  24. West, K. D. (1990). The Sources of Fluctuations in Aggregate Inventories and GNP. The Quarterly Journal of Economics, 105, 939–971.CrossRefGoogle Scholar

Copyright information

© Springer Science + Business Media, LLC 2006

Authors and Affiliations

  1. 1.Department of Accounting, Economics and FinanceTexas A&M International UniversityLaredo

Personalised recommendations