Who consumes the credit union subsidies?

Credit unions in the United States (US) are exempt (benefit from subsidies) from federal corporate income taxes, which are traditionally justified by their non-profit cooperative status and mission of meeting the financial needs of individuals of modest means. In recent years, the efficacy and fairness of these subsidies has been debated extensively as the traditional demarcation between banks and credit unions and their respective customer bases have blurred. To investigate how credit unions allocate subsidies to various stakeholders, we estimate a structural profit model for matched pairs of credit unions and commercial banks. We find that credit unions use most (approximately 90%) of their tax exemption for the benefit of their membership via above-market deposit interest rates. • US credit unions are exempt from federal income taxes. • We investigate how credit unions allocate the subsidies arising from the tax exemption to various stakeholders. • We use a profit function-based approach to compare the performance of credit unions to similar commercial banks. • We find economically large profit inefficiencies at credit unions relative to banks. • Most benefits from the tax subsidy are passed by credit unions through to members as above-market deposit interest rates. [ABSTRACT FROM AUTHOR]