Interactions between Regulatory and Corporate Taxes: How Is Bank Leverage Affected?

34 Pages Posted: 28 Sep 2018

See all articles by Franziska Bremus

Franziska Bremus

German Institute for Economic Research (DIW Berlin)

Kirsten Schmidt

Halle Institute for Economic Research

Lena Tonzer

Halle Institute for Economic Research

Date Written: September 2018

Abstract

Regulatory bank levies set incentives for banks to reduce leverage. At the same time, corporate income taxation makes funding through debt more attractive. In this paper, we explore how regulatory levies affect bank capital structure, depending on corporate income taxation. Based on bank balance sheet data from 2006 to 2014 for a panel of EU-banks, our analysis yields three main results: The introduction of bank levies leads to lower leverage as liabilities become more expensive. This effect is weaker the more elevated corporate income taxes are. In countries charging very high corporate income taxes, the incentives of bank levies to reduce leverage turn ineffective. Thus, bank levies can counteract the debt bias of taxation only.

Keywords: Bank levies, debt bias of taxation, bank capital structure

JEL Classification: G21,G28,L51

Suggested Citation

Bremus, Franziska and Schmidt, Kirsten and Tonzer, Lena, Interactions between Regulatory and Corporate Taxes: How Is Bank Leverage Affected? (September 2018). DIW Berlin Discussion Paper No. 1757. Available at SSRN: https://ssrn.com/abstract=3252433 or http://dx.doi.org/10.2139/ssrn.3252433

Franziska Bremus (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Kirsten Schmidt

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Lena Tonzer

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06018 Halle, 06108
Germany

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