Macroeconomic Effects of Taxes on Banking

This paper evaluates the macroeconomic effects of banking taxes—specifically on profits, deposits, and loans—in a small open economy within a currency union, such as the euro area. This analysis is particularly pertinent given the ongoing fiscal reforms in Spain, where such taxes are under parliamentary consideration. Employing a Dynamic General Equilibrium (DGE) model with a detailed banking sector, our findings indicate that these taxes have equivalent effects on macroeconomic variables. Banks respond to higher taxes by increasing mark-ups and passing on costs through elevated loan interest rates, thereby raising financial intermediation costs. While these taxes enhance government revenues, they lead to a long-term decline in GDP, higher loan rates, and reductions in credit, deposits, and bank capital. The analysis reveals a trade-off between revenue generation and economic activity, with a GDP-to-revenue multiplier near -1, independent of the tax rate. These results underscore the necessity for careful design of fiscal policies targeting the banking sector to minimize adverse economic impacts while achieving revenue objectives. JEL Classification: E30, E32, E43, E51, E52, E62.