Tax Policy, Leverage and Macroeconomic Stability
Policy Papers, October 12, 2016
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- Tax Policy, Leverage and Macroeconomic Stability
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Bibliographic details
- Published: October 12, 2016
- Series: Policy Papers
Overview
- The paper examines how tax distortions amplify risks to macroeconomic stability by encouraging excessive private leverage.
- Defines “debt bias” as tax provisions favoring finance by debt rather than equity and notes it has increased leverage in both the household and corporate sectors.
- States that debt bias is now widely recognized as a significant macroeconomic concern.
Findings and evidence
- Presents new evidence on the extent of debt bias, including estimates for banks and non-bank financial institutions both before and after the global financial crisis.
- Reports that thin capitalization rules restricting interest deductibility have only partially addressed debt bias.
- Reports that an allowance for corporate equity has generally proved effective in addressing debt bias.
Policy options and assessment
- Presents policy options to alleviate debt bias and assesses their effectiveness.
- Identifies thin capitalization rules as only partially effective.
- Identifies an allowance for corporate equity as generally effective.
Conclusion and implications
- Recommends that debt bias should feature prominently in countries’ tax reform plans in the coming years.
Subjects / Scope
- Borrowing
- Corporate sector
- Debt
- Financial sector
- Financial stability
- Nonbank financial sector
- Private sector
- Tax policy
Source: Tax Policy, Leverage and Macroeconomic Stability, October 12, 2016. Canonical URL: https://www.imf.org/en/publications/policy-papers/issues/2016/12/31/tax-policy-leverage-and-macroeconomic-stability-pp5073
Content in this bundle
- Tax Policy, Leverage and Macroeconomic Stability; IMF Policy Paper, October 7, 2016