Banks play a pivotal role in the financial system of any nation. Due to the scope of activities of the banking industry, it is vital for governments to regulate the industry. The global financial crisis portrayed the importance of banks in the financial system of any country.
The collapse of the banking industry led to the ultimate collapse of other industries (Ciro, 2013, p. 84). Governments use taxes as a source of revenue and for regulatory purposes. In the banking industry, governments should use taxation for regulatory purposes.
Since the global financial crisis, various governments have introduced various taxes on the financial sector. These taxes are at the domestic and international level. One of the major purposes of these taxes is to increase the Tier 1 capital of banks. This helps in solving the liquidity problems that banks may face.
In addition, increase in Tier 1 capital enables banks to support their risks (Alworth & Arachi, 2012, p. 173). Governments should ensure that there is careful consideration before using taxes for regulatory purposes.
It is vital for the government to consider whether banking regulation or taxation would help in achieving the desirable goals. Since banking regulation and taxation should run concurrently, it is vital for the government to consider their interaction. Ideally, these measures should complement each other.
Since banking regulation and taxation have various economic costs, it is vital for the government to undertake a cost benefit analysis to determine the most efficient measure. The cost benefit analysis would also help in identifying various problems that these measures may face.
This would enable the government to formulate strategies on how to avoid or cope with the problems. It is vital for governments to ensure that they consult relevant banking associations before implementing various taxation policies. This would help in determining the most effective tax rate.
In addition, consulting the banking associations would increase banks’ tax compliance (OECD, 2009, p. 117).
Alworth, JS & Arachi, G 2012, Taxation and the financial crisis, Oxford University Press, Oxford.
Ciro, T 2013, The global financial crisis: Triggers responses and aftermath, Ashgate Publishing, Hants.
OECD 2009, Building transparent tax compliance by banks, OECD Publishing, Paris.