Working Paper: CEPR ID: DP8122
Authors: Ben Lockwood
Abstract: This paper considers the optimal taxation of savings intermediation and payment services in a dynamic general equilibrium setting, when the government can also use consumption and income taxes. When payment services are used in strict proportion to final consumption, and the cost of intermediation services is fixed and the same across firms, the optimal taxes are generally indeterminate. But, when firms differ exogenously in the cost of intermediation services, the tax on savings intermediation should be zero. Also, when household time and payment services are substitutes in transactions, the optimal tax rate on payment services is determined by the returns to scale in the conditional demand for payment services, and is generally different to the optimal rate on consumption goods. In particular, with constant returns to scale, payment services should be untaxed. These results can be understood as applications of the Diamond-Mirrlees production efficiency theorem. Finally, as an extension, we endogenize intermediation, in the form of monitoring, and show that it may be oversupplied in equilibrium when banks have monopoly power, justifying a Pigouvian tax in this case.
Keywords: banks; financial intermediation services; monitoring; payment services; tax design
JEL Codes: G21; H21; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cost of intermediation services (G20) | optimal tax on savings intermediation (H21) |
| optimal tax on savings intermediation (H21) | relative cost of capital across firms (G32) |
| household time and payment services are substitutes (G59) | optimal tax rate on payment services (H21) |
| returns to scale in conditional demand (D24) | optimal tax rate on payment services (H21) |
| constant returns to scale (D24) | payment services should be untaxed (H29) |
| decreasing returns (D29) | payment services should be taxed (H29) |
| monopoly power of banks (E58) | oversupply of intermediation services (G20) |
| oversupply of intermediation services (G20) | justifying a Pigouvian tax (H23) |