Final Report: Detailed Analysis
D4. Taxing financial services
Financial services such as banking involve both the deferral of consumption and the current consumption of services to facilitate this deferral. For example, a deposit account involves both the deferral of consumption of the deposit funds and the consumption of various related or incidental services provided by the bank.
Some submissions to the Review have argued that the use of a financial service such as a loan does not involve consumption in itself, but merely provides the means to consume other goods and services (and should therefore not be included in the consumption tax base). However, the fact that the principal purpose of a service is to facilitate subsequent consumption does not mean that the service is not itself consumption.
If a person chooses to spend money to change some aspect of their consumption (for example, to bring it forward in time), they do so because the service they purchase yields additional value to them. As this increased value is reflected in the cost of the financial service, it is entirely appropriate that it be taxed as consumption. Other facilitation services, like the transport of goods, are similarly and correctly included in a consumption tax base.
An argument against the taxation of financial services is that such services are a complement to savings, and therefore taxing financial services contravenes the principle that consumption tax should not bias savings. However, this confuses savings with the future consumption facilitated by savings. The principle that present and future consumption should be treated equivalently under a consumption tax does not mean that current consumption associated with facilitating future consumption should go untaxed.
Other submissions have suggested that financial transactions be subject to additional tax to help reduce financial instability (see Box D4–1 A Tobin tax?). This would entail taxing financial services on a turnover basis, which is inconsistent with the taxation of other forms of consumption.
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