## Taxation, Bank Leverage, and Financial Crises

_IMF Working Papers, February 25, 2013_

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## Bibliographic details
- Authors: Ruud A. de Mooij, Michael Keen, Masanori Orihara
- Published: February 25, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475577709.001

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### 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.

### Key Findings
- Greater tax bias toward debt finance is associated with significantly higher aggregate bank leverage.
- Higher aggregate bank leverage is associated with a significantly greater chance of financial crisis.
- Addressing tax bias could yield welfare gains substantially larger than indicated by analyses that ignore financial stability effects.

### Policy Implications
- Policies that alleviate the corporate tax bias favoring debt over equity have the potential to reduce aggregate bank leverage.
- Reducing tax-induced debt bias can lower the probability of financial crises and deliver substantial welfare gains relative to approaches that ignore financial stability considerations.

*Source: Ruud A. de Mooij, Michael Keen, and Masanori Orihara, "Taxation, Bank Leverage, and Financial Crises", February 25, 2013, IMF Working Papers, Pages: 26, Issue: 048, DOI: https://doi.org/10.5089/9781475577709.001*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/taxation-bank-leverage-and-financial-crises-40341_