Policy Papers

Tax distortions are likely to have encouraged excessive leveraging and other financial market problems evident in the crisis. These effects have been little explored, but are potentially macro-relevant. Taxation can result, for example, in a net subsidy to borrowing of hundreds of basis points, raising debt-equity ratios and vulnerabilities from capital inflows.<br /><br /> This paper reviews key channels by which tax distortions can significantly affect financial markets, drawing implications for tax design once the crisis has passed.