Moral Hazard, Profits and Taxation of the Financial Sector

Wolfgang Eggert

Moral Hazard, Profits and Taxation of the Financial Sector

Abstract

Models on the taxation of banks typically analyze the consequences of VAT exemption for the EU and US financial sectors in models which reduce banks to ordinary firms. This paper analyzes the effects of taxes within the Hellman-Murdock-Stiglitz model of bank moral hazard. Our results indicate that full integration of banks into the VAT system rather than the creation of new taxes limits strategic behavior of profit-maximizing banks.