How Should Payment Services be Taxed?

Lockwood, Ben and Yerushalmi, Erez (2019) How Should Payment Services be Taxed? Social Choice and Welfare. pp. 1-27. ISSN 0176-1714

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Abstract

This paper considers the design of taxes on real money balances and bank payment services, when realistically, the household can use either cash or a bank payment account for the purchase of different varieties of goods. These taxes, plus a consumption tax, fund a government revenue requirement. We find that generally, real money balances and bank transaction fees should be taxed, and at different rates, i.e. the tax system should not leave the choice of payment services undistorted. For a wide class of time transactions cost technologies, including the Baumol-Tobin case, (i) fees should be taxed at a lower rate than real money balances, and (ii) the tax on real money balances should be positive. However, it is possible that fees should be subsidized. The rate of tax on fees has no simple relationship to the optimal consumption tax, and can be higher or lower. A Corlett-Hague type intuition for these results is also developed, which relies on the concept of a virtual time endowment.

Item Type: Article
Identification Number: doi.org/10.1007/s00355-019-01178-6
Date: 25 February 2019
Subjects: L100 Economics
Divisions: Faculty of Business, Law and Social Sciences > Birmingham City Business School > Department of Accounting, Finance and Economics
Faculty of Business, Law and Social Sciences > Birmingham City Business School > Centre for Applied Finance and Economics
Depositing User: Erez Yerushalmi
Date Deposited: 08 Mar 2019 15:36
Last Modified: 13 May 2020 05:30
URI: http://www.open-access.bcu.ac.uk/id/eprint/7018

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