Taxation of financial assets in developing countries

In developing countries, most financial assets in formal markets are deposits at financial institutions. This potentially important tax base could be taxed at a low administrative cost. When revenues of financial taxes are significant, implicit taxes dwarf explicit taxes. The author focuses on the implicit taxation of financial assets through seigniorage, reserve requirements, lending targets, and interest ceilings combined with inflation. The last instrument has often been overlooked, but it has generated more than a third of implicit revenues in some cases by lowering the cost of government borrowing. Tax revenues are difficult to measure because of regulations that prevent the use of market prices for computation and distort the meaning of some definitions. For some countries, the standard method of seigniorage grossly underestimates the revenue from financial taxation. The author discusses various sources of distortion but ignores potential impacts on the level of saving and the growth rate. Although taxes on financial assets have a low administrative cost, the excess burden that stems from the misallocation of resources is probably a much higher fraction of revenues than that of other taxes.