Annotated Bibliography Analyzes of Journal

“BANK PROFITABILITY AND TAXATION”

By:
SARI HARYANTI
07153128

International Class of Accounting

Economics Faculty
Andalas University
2011
 Bank Profitability And Taxation
By:Ugo Albertazzi & Leonardo Gambacorta

This paper is analyzed about how banks’ activity is affected by the corporate
income tax. Uses aggregate data on all main components of the profit and loss
account and on the interest rate applied on loans and on deposits for the
banking sector of the main industrialized countries during the period 1981–2003.

The main result is that the taxation of banks’ profit is equivalent to a taxation on
loans and as such it exerts a substantial impact on the composition of banking
sector revenues. However credit intermediaries have the ability to shift a
substantial part of their corporate income tax burden and therefore differences
in the level of taxation cannot explain the dispersion observed in banks’ net
profitability across industrialized countries.
Researcher investigate how bank profitability is affected by corporate income
taxation from a theoretical and an empirical perspective,
1. The theoretical finding :
• cost of equity effect :corporate income taxation in the banking sector
changes the costs of bank equity and therefore makes capital requirements
more or less tight.
• market effect : a higher CIT rate brings a reduction of investments from the
corporate sector and a downward shift of the demand for bank loans and
other bank services
2. The main empirical findings: consistent with the mechanisms highlighted by
the model: an increase in the CIT rate has a positive impact on the interest
rate demanded on loans and a negative one on the lending volume, while
leaving unaffected the deposit market.
The overall effect on the net interest margin is ambiguous: it tends to be
positive (negative) at relatively low (high) level of the CIT rate.

Over all, I stand on same point with the writers. Actually income taxes essentially
reflect a distribution of profit between a company and governmental agencies.
When corporate distribute the income means any reduction in corporate income
because of income taxes. Amount of total income that reduce will effect to
decision to used Bank’s service like loans and other, because in loans, the
income is the main consideration in ability to paying debt and their interest. And
one indicator of bank’s profitability is amount of loan can be offered and the
interest as income. So, there is any relationship between the CIT (corporate tax
income) and Bank’s profitability, even we know that’s still there are many
variable that effect bank’s profitability. The others factors that have big influence
also is inflation rate, the others factors are like stated in the econometric models:
real GDP annual growth rate of country, rate of inflation, the money market rate,
the long-term government bonds interest rate, etc.

I agree that the increasing of CIT rate will be have positive relation to demand
for loans, and have negative relation to lending volume with leaving un effected
the deposit market. But, I don’t agree with word ‘ambiguous’ relationship
between CIT to net interest margin, because the explanation is it tends to be
positive (negative) at relatively low (high) level of the CIT rate. In my opinion,
this explanation statement is already clearly stated that CIT have negative
(contrast) relationship with net interest margin. The others evidence is increase
CIT rate will decrease investment, decrease investment means decreasing
income. Fact from a simple theoretical model: for higher interest rates on loans
or for higher corporate income tax rate fewer investment projects have positive
net present value.

The main policy implications of the paper are:

1. If corporate income taxation interacts with capital requirements,
differences in the level of the CIT rate imply differences in the costs
associated to prudential regulation, a mechanism which to our knowledge
has not been explicitly analyzed.
2. Given that the distortions posed by the corporate income taxation tend to
influence primarily the lending market, differences in the statutory rates
across countries could distort bank incentives for locating investment
internationally, in particular for multinational banking groups.

For policy of CIT, we can see the trend declining from figure 1 the evolution of
the corporate income tax. So, the common policy from some popular countries
with high economic trend is reduce the CIT rate to help economic growth.