How Should Financial Intermediation Services be Taxed?

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 ...nal consumption, and the cost of intermediation services is ...xed and the same across ...rms, the optimal taxes are generally indeterminate. But, when ...rms di¤er 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 di¤erent to the optimal rate on consumption goods. The extension to the case of  commodities is studied, and conditions su¢cient for uniform taxation of goods and payment services within a period are obtained, generalizing the analysis of Auerbach and Gordon(2002). JEL Classi...cation: G21, H21, H25