Raising Revenue with Transaction Taxes in Latin America - Or Is It Better to Tax with the Devil You Know?
In recent years, various Latin American governments have resorted to taxes on bank debits and financial transactions as alternative ways of raising revenue. Considerable interest has developed in understanding the consequences of such reforms. The...
| Main Author: | |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2004/04/3401982/raising-revenue-transaction-taxes-latin-america-or-better-tax-devil-know http://hdl.handle.net/10986/14773 |
| Summary: | In recent years, various Latin American
governments have resorted to taxes on bank debits and
financial transactions as alternative ways of raising
revenue. Considerable interest has developed in
understanding the consequences of such reforms. The author
constructs a dynamic general equilibrium model to assess the
size of distortions and other quantitative implications
associated with a transaction tax. The distinctive feature
of the model is the non-neutrality property of the tax in
the sense that it distorts the structure of relative prices
of intermediate transactions, giving rise to tax
"pyramidation." The effective tax rate ultimately
borne by the economy is shown to depend on the complexity of
the transaction structure. Calibrated for Latin America, the
model finds that, contrary to existing evidence and
conventional wisdom, a transaction tax is not a particularly
burdensome levy in terms of economic growth and efficiency
costs. The model also shows that if a government can
credibly commit itself to an announced two-step reform in
which it first uses a transaction tax temporarily and then
replaces it with any other conventional tax, this policy
will improve economic welfare relative to a tax reform where
a consumption tax (or a labor income tax or a capital
earnings tax) is exclusively used from the start to raise
the required additional revenue. |
|---|