Must Financial Services Be Taxed Under a Consumption Tax?

Posted: 2 Jun 2000

See all articles by Harry Grubert

Harry Grubert

U.S. Department of the Treasury, Office of Tax Analysis (OTA); CESifo (Center for Economic Studies and Ifo Institute)

James B. Mackie III

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Abstract

The taxation of financial services used by households has been a stumbling block in designing consumption taxes. We present a theoretical case for exempting from tax investment services, loan services, and insurance services. These services are not consumption items. Instead, they represent the cost of smoothing consumption across time, as in the case of investment or loan services, and across states of nature, as in the case of insurance services. Since these services provide the funds used to purchase fully taxable consumption goods, these services should be expensed just as the cost of physical investment goods should be expensed.

JEL Classification: H20

Suggested Citation

Grubert, Harry and Mackie, James B., Must Financial Services Be Taxed Under a Consumption Tax?. Available at SSRN: https://ssrn.com/abstract=222528

Harry Grubert

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

James B. Mackie (Contact Author)

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States
(202) 622-1326 (Phone)

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