ACDE Trade & Development Seminars
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In responding to the Global Financial Crisis (GFC), the International Monetary Fund (IMF) made three main proposals for new taxes on financial services. The Financial Stability Contribution proposal has been adopted in Australia through the new Major Bank Levy. Australia has yet to adopt the IMF proposals for a Financial Activities Tax. The FAT1 would remove the concessional treatment of financial services under the GST, while the FAT2 would tax economic rents. This paper uses a CGE model (CGETAX) that allows for mark-up pricing under the Australian banking oligopoly to compare the three proposals. The big four banks are highly profitable by international standards, reflecting their substantial mark-ups. A rent tax on mark-ups would be highly efficient, have the potential to raise substantial revenue, and would be borne by shareholders. Removing the concessional treatment of financial services under the GST would be broadly neutral for efficiency, raise a moderate amount of revenue and the cost would be borne by customers. The Major Bank Levy is an inefficient tax, raises relatively little revenue and is likely to be passed on to customers with the oligopoly mark-up added.