Edwards, Jeremy, Michael Keen, and Matti Tuomala, 1994, “Income Tax, Commodity Tax and Public Good Provision: A Brief Guide,” FinanzArchiv, Vol. 51, No. 4, pp. 472-87.
Sinclair, John, 1803, The History of the Public Revenue of the British Empire, 3 rd ed., Vol. II (London: T. Cadell and W. Davies).
Spahn, Paul B., 1995, “International Financial Flows and Transactions Taxes: Survey and Options,” IMF Working Paper 95/60 (Washington: International Monetary Fund).
Umlauf, Steven, R., 1993, “Transactions Taxes and the Behavior of the Swedish Stock Market,” Journal of Financial Economics, Vol. 33, Issue 2, pp. 227-40.
The authors would like to thank their many IMF colleagues who provided useful comments and information.
The term “financial transactions tax” as used here means a tax levied on each instance of specified banking, equity, currency, securities, or other financial dealings between a broad base of market actors. “Bank debit taxes” are a subset of financial transactions taxes, levied on withdrawals from or other debits to bank accounts, and generally including the clearance of checks, cash withdrawals, payment of loan proceeds, withdrawals through ATMs, and possibly charges to bank issued (or other domestic) credit cards. The bases of the bank debit taxes in Latin America are detailed in Appendix III.
In contrast to the Tobin-type taxes, which have the objective of altering behavior to minimize “undesirable” market effects, the bank debit taxes aim at raising revenue in a manner that minimizes the impact on economic behavior.
Little published research exists evaluating the recently introduced bank debit taxes, nor is much actual data available. This study accordingly relies in part on facts and assessments regarding these taxes obtained from IMF staff reports and provided by expert officials in the countries in question. Future work in this area would usefully include econometric analyses to obtain a finer discrimination between effects associated with bank debit taxes and those associated with underlying economic developments.
The reintroduction of the tax in Argentina in April 2001 is too recent to warrant analysis.
This assumes that all transactions flow through the banking system, that the taxes are applied only to one way transactions, and that mechanisms exist to eliminate from the base transactions between accounts within and between financial institutions on behalf of the same taxpayer (e.g., no tax on the settlement of a credit card bill where the charge to the credit card has already been subjected to the tax).
The distortionary nature of these taxes has been recognized for some time in Australia where similar taxes are used at the state level (see Appendix I).
Including from abroad—the bank debit taxes as currently practiced apply equally to branches of foreign banks and to nonresidents.
Taking the example of Tobin taxes, the annual interest rate that would be required to match a 4 percent rate on domestic currency deposits given a Tobin-type tax at a 0.5 percent rate would range from 4.6 percent, for a foreign currency investment with five-year maturity, to 90.7 percent, for one with a three-day maturity (Spahn, 1995). Of course, this is one of the reasons Tobin taxes have been proposed.
As with other transactions taxes, the excess burden of the bank debit tax depends in part on the elasticity of demand for the taxed service. Demand for checking accounts may be quite inelastic at very low tax rates; however, the elasticity would increase as the rates rise, rendering the tax more inefficient.
Although not discussed due to the Latin American focus of the current paper, Australia introduced a similar bank transactions tax at the federal level in 1983. This became a state level tax in 1990. The tax is now slated to be removed by 2005. See Appendix I.
Tax Notes International, April 25, 1994.
The taxation of both debits and credits is also a feature of the tax recently introduced in Argentina.
The tax law adopted in April 2001 by Argentina allows for credit against the VAT, income tax, and the small traders tax; however, the government preferred to adopt a rate (0.25 percent) much lower than the maximum (0.60 percent) instead of enabling the credit mechanism.
In addition, the tax base in Ecuador exempts withdrawals from savings accounts and from ATMs. Since the Ecuadorian tax applies to credits as well as debits, however, these latter exemptions in effect simply make the tax in those cases a one-way transactions fee.
Is the rising trend only evident in those Latin American countries that rely on the bank debit tax? A review of the behavior of the cash to narrow-money ratio in some Latin American countries that did not have the tax in the same period of time presents a mixed picture. Specifically, a rising trend is evident in Mexico whereas the ratio declines in Uruguay and is trendless for Argentina and Mexico.
Remarks by Guillermo Calvo, Carlos Rodriguez, Orlando Ferreres, and Juán Alemann in Ambito Financiero, Buenos Aires, May 11, 2000.
Foreword of Decree No. 20-92-PCM, March 17, 1992.
At present, there are strict limitations to the number of check endorsements.
Superintendencia Nacional de Administración Tributaria (SUNAT).
La Republica, Caracas, January 15, 2000. The issue arises as to whether the increased popularity of ADRs reflects the tax or just globalization trends in Latin America in general. The data we have is only partial—in particular, it concerns issuance of stocks rather than trading volume. The former, however, may be a more useful indicator of the interest in ADRs as a result of globalization. New York Stock Exchange data indicate that, in the cases of both Argentina and Mexico, the peak period of new companies issuing ADRs was 1992–1994, which is consistent with the fact of the initial surge in ADR activity being early in the decade.
La Republica, Caracas, February 10, 1999.
The facts in this section have been gleaned from numerous articles in various Brazilian and international business publications.
Intrafund transfers are not taxed—neither purchases nor redemptions at maturity of government bonds are taxed when made by the funds. In the case of individual investors, both (plus the rollover of the proceeds) are taxed.
If the new instruments are perfect substitutes for those they replaced, the distortionary impact of the tax would be eliminated.
Trade in derivatives, mostly conducted through the Commodities and Futures Exchange (BM&F) and money market operations, did not decline much with the advent of the CPMF because most transactions in these markets have financial institutions at both ends, and are thus exempt from the tax.
As noted in footnote 25 above, the popularity of ADRs in other Latin American countries appears to date to an earlier period. In the Brazilian case, however, and focusing again on the New York Stock Exchange, only one Brazilian company floated ADRs in the period 1991–96, whereas 12 companies did so in 1997/98, a period when the tax was in place.
When a transactions tax of 2 percent (1 percent on both purchases and sales) was introduced in Sweden in 1986, 30 percent of all trading in the Stockholm Stock Exchange migrated to London. By 1990, the proportion of Swedish share volumes trading in London had grown to over 50 percent (Umlauf, 1993).
According to the president of the Securities and Exchange Commission (CVM), “The main impact of the CPMF is the movement of business to the New York markets, where business people can buy the same stocks at lower cost.” (Gazeta Mercantil InvestNews, May 29, 2000). In addition, reportedly, Central Bank Governor Fraga recently declared that “the CPMF is the great enemy for the formation of capital and savings in Brazil.”
Ignacio Lozano E. and Jorge Ramos F., “Análisis sobre la incidencia del impuesto del 2x1000 a las transacciones financeiras,” Borradores de Economía, Series No. 143 (Santa Fé de Bogotá: Banco de la República, 2000).
“2x1000: Para Siempre,” Carta Financiera, March 2000, pp. 54–58 (Bogota: ANIF).
IMF staff estimate (December on December).
The countries that do not permit crediting generally do allow the debit tax as a deduction from taxable corporate income, leading to similar implications for the business sector.
In Brazil, a law was passed in January 2001 allowing the use of information collected in connection with the debits tax to control compliance with other taxes. In Ecuador, the data collected through the transactions tax purportedly permitted the authorities to circumvent banking secrecy requirements.
From a study prepared by the Dirección de Impuestos Nacionales y Aduanas-DIAN, cited by the President of the Third Commission of the Chamber of Representatives (La República, Bogotá, May 25, 2000). Of course, it is also possible that disintermediation caused in the first instance by the tax could, itself, indirectly foster or facilitate underground activity.
The tax was originally called the “Bank Account Debits Tax” and became known as the BAD Tax. The tax also applies to payment order accounts with nonbanking financial institutions.
The unweighted average of these rates, taken at midpoints (except for the top rate, which is taken at the lower limit), corresponds approximately to an ad valorem rate of 0.2 percent.
“Tax Reform: Not a New Tax, A New Tax System” (Canberra: Treasurer of the Commonwealth, 1998).