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Must Financial Services be Taxed Under a Consumption Tax?

Harry Grubert and James Mackie
National Tax Journal
Vol. 53, No. 1 (March, 2000), pp. 23-40
Published by: National Tax Association
Stable URL: http://www.jstor.org/stable/41789439
Page Count: 18
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Must Financial Services be Taxed Under a Consumption Tax?
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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.

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