The bank debit tax in Colombia

Abstract

Colombia has had a bank debit tax (BDT) since 1998. It was originally enacted as a temporary measure to finance the bailout of bankrupt financial institutions. The BDT is one variant of the broader class of taxes on financial transactions. The Colombian BDT, known formally as the Gravamen a los Movimientos Financieros (GMF), is a tax on withdrawals from savings and checking accounts, credit card transactions, loan disbursements, and certain other transactions. It was originally imposed at a 0.2 percent rate, and increased to 0.3 percent and made permanent in 2001. The tax is an important source of tax revenue to Colombia, contributing revenues equal to about 0.8 percent of GDP. The tax is similar in concept to the currency transactions tax proposed by Nobel Laureate James Tobin in the late seventies.1 Although Tobin’s proposal sought to reduce the volatility of international financial markets, Latin American countries have been attracted to the BDT primarily because it raises a lot of money at what seems to be a low tax rate (Coelho et.al. 2001). Although all taxes have costs, the BDT may be especially burdensome. The BDT is a tax on financial intermediation. As such, it tends to encourage disintermediation. The tax is also tantamount to a cascading sales tax in sectors of the economy that use the banking system to facilitate transactions. Both of these factors create efficiency costs for the Colombian economy. This paper examines the economic effects of the BDT in Colombia through its effects on cash demand, net interest margins and profitability of financial intermediaries, and using a general equilibrium model to estimate the welfare cost in the real sector. A concluding section makes policy recommendations.