Bank Transaction Taxes

• Author: Andrei Kirilenko
• Pages: 1-5

Page 1

When, in 1898, the U.S. government introduced a two-cent tax on bank checks to finance the Spanish-American War, little did it know that a century later many Latin American countries would use similar taxes to fight their own fiscal battles. Since 1976, taxes on bank transactions have been introduced repeatedly in Argentina, Brazil, Colombia, Ecuador, Peru, and Venezuela.

As of the end of 2006, such taxes were in effect in seven Latin American and Caribbean countries: Argentina, Brazil, Bolivia, Colombia, the Dominican Republic, Peru, and Venezuela.

There is considerable variation across countries in the design of these taxes. Usually, taxes on bank transactions are levied on withdrawals from bank accounts, including the clearance of checks and the use ofPage 4 automated teller machines (ATMs), as well as on payments of loan installments. In addition, in Argentina, Colombia, and Ecuador, these taxes have been levied on all, or some, bank credit transactions. There is also considerable diversity in what these taxes are called, with names including bank debit taxes, bank account debit taxes, and financial transaction taxes.

Bank transaction taxes (BTTs) were typically introduced at a time of crisis to quickly generate a burst of revenue. There are several reasons why these taxes are quite appealing as fiscal instruments, especially at times of fiscal distress. First, collection and administration costs of bank transaction taxes are minimal, since the banks simply transfer a portion of each qualified transaction to a government account. Second, the government enjoys an immediate and continuous revenue stream, since these taxes are collected from transactions in real time. Third, there is not much organized popular opposition to these taxes, since they are typically introduced as a "tax on the rich." Finally, and most importantly, the short-term revenue performance of bank transaction taxes is usually quite strong. In their descriptive paper, Coelho, Ebrill, and Summers (2001) confirm that BTTs have been successful in raising revenue in the short term. They also document abundant anecdotal evidence, however, that these taxes have resulted in financial disintermediation. The authors argue that BTTs should be avoided unless the country has significant fiscal needs that cannot be met by more appropriate tax instruments.

Kirilenko and Perry (2004) estimate the degree of disintermediation (a permanent erosion of the tax base) resulting from...