23 May, 2020

Quora Answer: If We Pay Taxes for Every Money Exchange, Why Do Banks Not Pay Taxes for Every Deposit?

The following is my answer to a Quora question: “If every time we exchange money, we pay taxes, why do banks not have to pay taxes every time a customer deposits money with them? 

Depending on where you are, there is a tax on income, which seeks to redistribute wealth from the higher earners to the lower earners; there is a tax on consumption, which seeks to encourage savings and earnings; and there is a tax on capital gains and property, which seeks to redistribute hoarded wealth.  Tax is a mechanism to shape the consumption and investment habits of the population to better benefit the population of the state.  It is not just a means of revenue. 

Putting money in the bank benefits the economy to an extent.  Taxing banks for taking deposits would discourage deposits, because that cost will be passed on to the people, and people would be hoarding cash at home.  This means money is not circulating, and this could lead to a contraction of the economy due to a lack of liquidity.  Also, considering the scale of the deposits, taxing banks would affect their liquidity and reserve ratio.  Less money would be available to the market in terms of loans, or loans would become expensive.  This affects consumption, and that will be detrimental to the economy. 

All that aside, the main reason is that legal ownership of the funds is not with the banks, but the owner of the deposits.  You cannot tax the banks for holding funds in trust for owners in a contractual relationship, when the monies do not actually belong to them; they merely manage them within strict parameters.



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