Taxation, Bank Leverage, and Financial Crises

Author/Editor:

Ruud A. de Mooij ; Michael Keen ; Masanori Orihara

Publication Date:

February 25, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

That most corporate tax systems favor debt over equity finance is now widely recognized as, potentially, amplifying risks to financial stability. This paper makes a first attempt to explore, empirically, the link between this tax bias and the probability of financial crisis. It finds that greater tax bias is associated with significantly higher aggregate bank leverage, and that this in turn is associated with a significantly greater chance of crisis. The implication is that tax bias makes crises much more likely, and, conversely, that the welfare gains from policies to alleviate it can be substantial—far greater than previous studies, which have ignored financial stability considerations, suggest.

Series:

Working Paper No. 2013/048

Subject:

Bank levy Banking Banking crises Corporate income tax Debt bias Financial crises Tax policy Taxes

English

Publication Date:

February 25, 2013

ISBN/ISSN:

9781475577709/1018-5941

Stock No:

WPIEA2013048

Pages:

26

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