Should Financial Services Be Indirectly Included in the Utility Function?

This paper discusses the suitability of directly incorporating financial services in the utility function, showing that, in this case, these services might be fully taxed, both implicit and explicit fees, with the same tax rate as the rest of goods and services for avoiding distortions in intertemporal households’ decisions. This is the first article theoretically considering this issue in a dynamic model, in addition to providing empirical evidence of the effects on the real and financial activity of the VAT rate divergence between general goods and services and financial services using international-macroeconomic data for 1960-2019. This divergence is associated with lower economic growth and trade openness, less commercial bank branches and a higher level of income inequality