Debt Bias in Corporate Income Taxation and the Costs of Banking Crises

38 Pages Posted: 27 May 2015

See all articles by Sven Langedijk

Sven Langedijk

European Union - European Commission; Joint Research Center of the European Commission

Gaëtan Nicodème

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management; CEPR and CESifo The views expressed in the article are those of the author and should not be attributed to the European Commission.

Andrea Pagano

European Union - Directorate General for Research and Innovation

Alessandro Rossi

European Union - Directorate General for Research and Innovation

Date Written: May 2015

Abstract

Corporate income taxation (CIT) in most countries favors debt over equity financing, leading to over-indebtedness. This problem is particularly acute for the financial sector. We estimate financial-stability benefits of eliminating this debt bias. We estimate the long-run effects of CIT on bank leverage and, using a Vasicek-based model of banking crisis losses, we find that eliminating this debt bias could reduce public finance losses in the range of 30 to 70%. These results hold even for conservative estimates of bank-leverage and portfolio-risk effects of CIT changes.

Keywords: capital structure, debt bias, public finance, systemic risk, taxation

JEL Classification: G01, G28, G32, H25

Suggested Citation

Langedijk, Sven and Nicodeme, Gaetan and Pagano, Andrea and Rossi, Alessandro, Debt Bias in Corporate Income Taxation and the Costs of Banking Crises (May 2015). CEPR Discussion Paper No. DP10616, Available at SSRN: https://ssrn.com/abstract=2610751

Sven Langedijk (Contact Author)

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
1049
Belgium

Gaetan Nicodeme

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

CEPR and CESifo The views expressed in the article are those of the author and should not be attributed to the European Commission.

No Address Available

Andrea Pagano

European Union - Directorate General for Research and Innovation ( email )

Brussels
Belgium

Alessandro Rossi

European Union - Directorate General for Research and Innovation ( email )

Brussels
Belgium

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