context and issues
Recently, the proposal to tax bank deposit interest has become a controversial topic among experts and public opinion. There are many supportive views that this policy will help increase budget revenue and ensure tax fairness between different income groups. On the contrary, many opinions are concerned that taxing deposit interest can reduce people's savings motivation, negatively affecting the banking system and the macro economy.
This paper will focus on analyzing the legal and economic basis for taxing deposit interest, assessing the impact of this policy on the financial system and people's savings behavior, and expanding discussions on real estate tax, bond tax and securities in the context of Vietnam. On that basis, propose appropriate solutions to ensure that if applied, tax policies will not disrupt the financial market, while still achieving the goal of increasing budget revenue in a sustainable and fair manner.
Legal and economic basis of deposit interest tax policy
On the side of international law and practice
In Vietnam, bank deposit interest is currently not subject to personal income tax. This is regulated under the Law on Personal Income Tax (amended and supplemented), in which income from deposit interest at banks and credit institutions is exempted from tax to encourage savings, ensure capital for the banking system, thereby indirectly promoting investment and economic growth.
However, taxing deposit interest is not a strange policy in the world. In many countries such as the US, UK, and Japan, deposit interest is considered a form of passive income and subject to tax at the personal income level. For example, in the US, income from bank deposit interest is included in total taxable income and must be declared when paying personal income tax. US banks also implement a policy of Withholding tax, which is to deduct tax directly from interest before paying to customers, helping to control taxes more closely.
However, the application of deposit interest rates in Vietnam needs to be considered in the current legal context. According to the provisions of the Law on the State Bank of Vietnam, the banking system still plays a key role in providing capital for the economy, because the financial market has not developed strong enough to completely replace the role of bank credit. This means that deposits from residents are still an important source of capital to help banks maintain liquidity and provide credit to businesses and households.
Changing tax policies will require synchronization with the financial system and national monetary policy. If deposit interest rates are taxed without reasonable adjustments in liquidity management, the banking system may be under great pressure to mobilize capital, forced to increase interest rates, leading to higher credit costs for businesses and people.
Economic factors and savings behavior
In economics, real interest rates play an important role in personal savings decisions. When bank deposit interest brings attractive profits, people tend to maintain and increase savings, thereby contributing to stabilizing capital for the financial system. However, if deposit interest is taxed, net profit after tax will decrease, affecting the attractiveness of the banking savings channel.
The savings theory shows that taxes can affect financial behavior in two directions. On the one hand, the alternative effect occurs when real profits are reduced, causing people to prioritize consumption or seek other forms of investment instead of continuing to accumulate assets in banks. On the other hand, the income effect causes some people, especially high-income groups, to increase savings to compensate for lost income due to taxes.
The impact of deposit interest rates depends on the economic structure and financial habits of each country. In countries with developed financial systems such as the US, Germany or Japan, people have many investment options and are supported by social security policies, so deposit interest rates do not significantly affect savings decisions. Meanwhile, in Vietnam, where bank deposits are still an important asset accumulation channel to prevent risks, taxation can change individuals' financial strategies and lead to capital flow shift in the economy.
Tax policy design needs to take into account the socio-economic characteristics of Vietnam, avoiding creating a big shock to people's savings habits. At the same time, there should be supplementary mechanisms to ensure fairness in the tax system, limit the accumulation of passive assets without disrupting the financial system.
The impact of taxing deposit interest on the financial system
Impact on bank operations
The current Vietnamese banking system still plays a core role in providing credit to the economy, because the market has not developed strong enough to completely replace the role of banks. Deposits from residents are an important source of mobilization to help banks maintain liquidity and provide credit to businesses and individuals. If deposit interest tax is applied, this can create significant consequences for the banking system, specifically as follows:
Decreased liquidity of the banking system: When taxing deposit interest, people can find ways to withdraw money from banks to find alternative investment channels or keep assets in informal forms. This causes the cash flow in banks to shrink, reducing the ability to provide credit to the economy, especially in the context of Vietnam still relying heavily on bank credit capital instead of other mobilization sources such as bonds or capital markets.
Banks may have to increase deposit interest rates: When deposit sources decrease sharply, commercial banks will have to increase deposit interest rates to attract capital flows. This leads to increased borrowing costs, forcing businesses to pay higher interest rates to access capital, thereby reducing the incentive to expand production and business. This could slow down economic growth and negatively affect the labor market.
Increased pressure on foreign exchange rates and capital flows: When bank deposit profits are reduced due to taxes, a part of investors may shift cash flow abroad to seek markets with more attractive yields or less tax risks. This can increase the phenomenon of "diversity" or foreign currency bleeding, directly affecting the exchange rate. If capital flows are withdrawn from the domestic banking system en masse, the State Bank may be forced to intervene to stabilize the exchange rate, thereby increasing pressure on national foreign exchange reserves.
Changes in people's financial behavior
In addition to affecting the banking system, applying deposit interest rates can also have a significant impact on people's financial behavior, leading to changes in the way they allocate assets and use capital. Some possible trends include:
Shift capital flow to other investment channels: When actual interest rates from deposits are reduced due to taxes, people can look to other investment channels to optimize profits, such as:
Gold and foreign currency: These are traditional investment channels in Vietnam, especially attractive during periods of high economic policy instability. If deposit interest rates are implemented without proper regulatory measures, it can increase speculation on gold and foreign currency, negatively affecting exchange rate stability and inflation.
Real estate: A significant number of investors can withdraw deposits and switch to real estate investment with the expectation of higher profits. This can make the real estate market more vibrant in the short term but also poses a risk of forming a real estate price bubble, especially if capital flows into the speculative segment instead of real housing development.
Securities and bonds: For investors with a higher risk appetite, stocks and corporate bonds may become an alternative to bank deposits. However, if this capital flows into the market without control, it can increase fluctuations and risks in the stock market, especially when individual investors tend to invest according to crowd psychology.
Changes in savings habits: Vietnam is one of the countries with a high savings rate because people have the habit of accumulating assets to ensure personal financial safety. However, when deposit interest is taxed, the attractiveness of savings deposits may decrease, changing people's financial habits. Instead of depositing money in banks to enjoy stable interest rates, many individuals may choose to keep cash or invest in informal assets, reducing the ability of the financial system to control cash flow.
In short, taxing deposit interest can shift capital flows from banks to other investment channels, increasing speculative risks, affecting the liquidity of the financial system and causing instability for the macro economy. If this policy is not carefully designed, Vietnam may face many consequences, from exchange rate pressure, fluctuations in the financial market, to the risk of asset bubbles and declining resource allocation efficiency in the economy.
Real estate, bond and securities taxes: issues
Real estate tax
In Vietnam, real estate tax is currently only limited to revenues such as non-agricultural land use tax, personal income tax from real estate transfers, and registration fees. Meanwhile, developed countries such as the US, Canada, Japan or South Korea all apply annual property tax on real estate value, to ensure fairness in asset distribution and create sustainable revenue for the state budget.
The failure to effectively apply real estate tax in Vietnam has led to some notable consequences:
The situation of real estate speculation and hoarding increases: When not under tax pressure, many individuals and organizations tend to invest in real estate to hold for a long time instead of exploiting or putting it into transactions. This contributes to a decline in the housing supply that truly serves real housing needs, causing real estate prices to increase.
The state budget is missing an important source of income: When real estate is not subject to regular property tax, the state loses a stable, long-term source of income, while having to rely heavily on corporate income tax and value added tax (VAT). This has caused the tax system to not be effective in regulating the economy.
Real estate tax is considered an effective tool to control speculation, create a stable source of revenue for the budget and direct capital flow to economic activities instead of hoarding assets. However, the implementation requires careful consideration to ensure compliance with market reality and socio-economic conditions at each time. Property tax not only requires fairness in the tax system, but also requires a reasonable roadmap to avoid creating unwanted impacts, especially in the context of the market needing stability.
Bond and securities tax
The capital market, including bonds and stocks, is becoming an important capital mobilization channel in Vietnam, helping to reduce dependence on the banking system. However, tax policies for this market are still not really clear and synchronous, especially in the context of Vietnam gradually perfecting the legal framework on securities and corporate bonds.
Bond tax
Currently, income from corporate bonds in Vietnam is not directly taxed to individual investors, but is only subject to personal income tax when conducting transactions on the secondary market. Meanwhile, in many countries such as the US, income from government bonds is often tax-free, while corporate bonds are subject to personal income tax but at a low level to encourage long-term investment.
Applying tax on bond interest in Vietnam may have significant impacts. First of all, it can reduce the attractiveness of corporate bonds, especially when taxes reduce the actual interest rate. This may hinder the ability of businesses to mobilize capital, especially in the context that many businesses still rely mainly on bank credit. In addition, cash flow may shift to other investment channels, reducing the liquidity of the bond market and increasing capital costs for businesses.
To maintain the development of the bond market under the tax, Vietnam may consider applying preferential tax rates for long-term bonds to encourage stable and sustainable investment flows, instead of focusing on speculative short-term investments. At the same time, tax exemption for government bonds and some types of special bonds can be a solution to attract capital for socio-economic development projects, contributing to ensuring the competitiveness of the financial market.
Stock tax
The Vietnamese stock market currently applies a fixed personal income tax of 0.1% on trading value, instead of taxing on net profit like many other countries.
This can cause some problems such as investors still having to pay taxes even when trading at a loss, making the tax burden unfair. At the same time, it reduces the attractiveness of the stock market, especially in the context of Vietnam wanting to attract foreign capital into the capital market.
Some countries such as Singapore and Hong Kong (China) have applied tax exemption policies for securities transactions, helping to increase liquidity and attract investment.
Tax policy solutions in the new context
Based on the analysis of the impacts of taxing deposit interest rates, real estate tax, bonds and securities, the development of a suitable tax policy needs to be based on the principle of balancing the goal of increasing budget revenue and maintaining stability of the economy. Tax policies should not be applied suddenly but need a reasonable roadmap to avoid creating shocks for the financial market. Here are some important policy proposals:
Reasonable roadmap for deposit interest tax
In the current context, the Vietnamese banking system is still the main capital mobilization channel for the economy, while the financial market is not developed enough to replace this role. If deposit interest rates are taxed immediately, it can reduce bank liquidity, push up deposit interest rates, and put pressure on borrowing costs for businesses and people.
Therefore, the tax on deposit interest should not be applied immediately, but a research and testing roadmap is needed before being officially implemented. The government can conduct an impact assessment of this policy within 3-5 years, and monitor the market reaction before making a final decision.
Develop a reasonable tax exemption threshold for deposit interest
If in the future, deposit interest rates are applied, it is necessary to ensure that they do not cause negative impacts on the middle and low-income groups, those who depend on savings interest rates to maintain their lives. Some countries when taxing deposit interest have established tax exemption thresholds for small deposits to protect this population group.
Vietnam can apply a similar policy by:
Exemption from tax for small deposit interest, for example under 1 billion VND to ensure the benefits of employees and pensioners.
Apply progressive tax on large deposits, to ensure tax fairness and limit the accumulation of passive assets instead of investing in economic activities.
Reforming real estate tax policies to limit speculation
Real estate is one of the investment sectors with high profits but is not currently subject to periodic property tax. This creates conditions for speculators to hoard real estate without any tax pressure, causing housing prices to increase, affecting the ability to access housing for low-income people.
The Government can implement real estate tax reform in the direction of:
Scaled taxation for second and higher real estate aims to limit speculation but still ensure that people with real housing needs are not affected.
Exemption or reduction of tax for social housing and low-income housing to ensure access to housing for this group of residents.
Decentralizing tax collection to local governments, similar to the model of many developed countries, helps localities have more revenue to develop infrastructure and public services.
In general, real estate tax is an important tool to regulate the market, limit speculation, and increase budget revenue. However, the implementation needs to be carried out according to a suitable roadmap, ensuring stability for the real estate market, while not causing too much disruption to investors' psychology as well as people's access to housing.
Adjusting bond and securities taxes to boost the capital market
The bond and stock markets play an important role in mobilizing capital for the economy, but if the tax policy is not designed appropriately, it can reduce investment motivation, making it difficult for businesses to mobilize capital.
Vietnam can refer to international experience to build a reasonable tax policy:
Apply lower tax rates to long-term bonds to encourage investors to keep capital stable in the market.
Exemption or reduction of tax for securities held for more than 1 year, to encourage long-term investment instead of short-term transactions of speculative nature.
Improve the securities tax model, shifting from tax on transaction value (0.1%) to tax on net profit, ensuring more fairness for investors.
Tax policies for bonds and securities need to be carefully designed to not reduce market liquidity, while ensuring capital attraction in areas with high added value.
Conclusion
Taxing deposit, real estate, bond and securities interest rates is an issue that has a profound impact on the financial system and the economy. Tax policies not only aim to increase state budget revenue, but also ensure fairness, stability and promote sustainable economic growth.
An effective tax system needs to ensure a balance between budget revenue goals and economic stability, and must be implemented according to an appropriate roadmap with a full impact assessment before promulgation. Tax policies need to be built on the basis of practical research, learning international experience and ensuring suitability with Vietnam's socio-economic conditions.
