QUICK, FINAN AND ASSOCIATES
Tax policy and financial intermediaries in less developed countries
Although financial intermediaries such as commercial and savings banks are crucial to economic growth, many developing countries actively inhibit the process of financial intermediation by imposing repressive financial policies, the most direct of which is taxation.
1989
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Abstract
This study examines the relationship between tax systems and financial intermediation, with emphasis on the A.I.D.-recipient countries of Botswana, Costa Rica, Jordan, and Zambia. Part I provides background information on the role and functioning of financial intermediaries in a competitive, free market environment. Part II identifies the primary ways in which financial intermediaries are taxed, while Part III provides an analytical framework for evaluating the frequently discriminatory impact of these tax systems on intermediaries. Emphasis is laid on the ways in which after-tax returns serve to allocate capital to various industries, and in which taxes act together to affect the after-tax rate of return. Recommendations in the final section of the report focus on improving these tax systems by: (1) setting tax rates as uniformly as possible across industries and sectors, (2) eliminating transactions or turnover taxes in favor of retail sales taxes on consumption or inceases in income taxes, and (3) removing controls on interest rates.
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