A General Equilibrium Analysis of Bank Debit Taxes

Abstract

Taxes on bank debit transactions have been used as an easy way to collect substantial revenue, especially during economic crisis. The existing literature has found evidence of distortionary effects of this policy on money demand and interest rates, even if the tax is charged at very low rates. Instead of studying these monetary topics, this paper develops a general equilibrium model with no money and no nominal rigidities to explain the effects of bank debit taxes on real resources allocation, welfare, and revenue. The study demonstrates that bank debit taxes reduce the size of the financial system and increase deadweight loss. The model also shows that under certain plausible situations, these levies reduce the size of the sector that manufactures high-value goods.