Banks, Debt and Risk: Assessing the Spillovers of Corporate Taxes

22 Pages Posted: 14 May 2020

See all articles by Serena Fatica

Serena Fatica

European Commission - Joint Research Centre

Wouter Heynderickx

Joint Research Center of the European Commission; KU Leuven - Department of Mathematics

Andrea Pagano

Joint Research Center of the European Commission

Date Written: April 2020

Abstract

We find evidence of tax‐driven strategic allocation of debt and asset risk across group entities of European banks. We evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk, and show that the degree of coordination in implementing the hypothetical tax reform matters. In particular, a coordinated elimination of the tax advantage of debt would significantly reduce systemic losses in the event of a severe banking crisis. By contrast, uncoordinated tax reforms are not equally beneficial precisely because national tax policies generate spillovers through cross‐border bank activities.

JEL Classification: G21, G28, H25

Suggested Citation

Fatica, Serena and Heynderickx, Wouter and Pagano, Andrea, Banks, Debt and Risk: Assessing the Spillovers of Corporate Taxes (April 2020). Economic Inquiry, Vol. 58, Issue 2, pp. 1023-1044, 2020, Available at SSRN: https://ssrn.com/abstract=3596425 or http://dx.doi.org/10.1111/ecin.12827

Serena Fatica (Contact Author)

European Commission - Joint Research Centre ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Wouter Heynderickx

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
Brussels, B-1049
Belgium

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

Andrea Pagano

Joint Research Center of the European Commission

Via E. Fermi 2749
Brussels, B-1049
Belgium

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