Taxation, Bank Leverage, and Financial Crises

27 Pages Posted: 7 Mar 2013

See all articles by Ruud A. De Mooij

Ruud A. De Mooij

International Monetary Fund (IMF); CESifo (Center for Economic Studies and Ifo Institute); Oxford University Centre for Business Taxation

Michael Keen

International Monetary Fund (IMF) - Fiscal Affairs Department; CESifo (Center for Economic Studies and Ifo Institute); Institute for Fiscal Studies (IFS)

Masanori Orihara

University of Tsukuba

Date Written: February 2013

Abstract

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.

Keywords: Bank taxation, Banks, Corporate sector, Corporate taxes, Financial crisis, Tax systems, Taxation, corporate tax, debt bias, leverage

JEL Classification: G21, G32, H25

Suggested Citation

De Mooij, Ruud A. and Keen, Michael and Orihara, Masanori, Taxation, Bank Leverage, and Financial Crises (February 2013). IMF Working Paper No. 13/48. Available at SSRN: https://ssrn.com/abstract=2229657

Ruud A. De Mooij (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Oxford University Centre for Business Taxation ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

HOME PAGE: http://people.few.eur.nl/demooij/

Michael Keen

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Institute for Fiscal Studies (IFS)

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Masanori Orihara

University of Tsukuba

1-1-1 Tennodai
Tsukuba, Ibaraki 305-8573
Japan

HOME PAGE: http://sites.google.com/view/orihara/

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