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Taxation, Bank Leverage, and Financial Crises

Author: Ruud A. de Mooij

Publisher: International Monetary Fund

Published: 2013-02-25

Total Pages: 26

ISBN-13: 1475577702

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.

Taxation and Leverage in International Banking

Author: Ms.Grace Weishi Gu

Publisher: International Monetary Fund

Published: 2012-11-30

Total Pages: 35

ISBN-13: 1475572204

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This paper explores how corporate taxes affect the financial structure of multinational banks. Guided by a simple theory of optimal capital structure it tests (i) whether corporate taxes induce subsidiary banks to raise their debt-asset ratio in light of the traditional debt bias; and (ii) whether international corporate tax differentials vis-a-vis foreign subsidiary banks affect the intra-bank capital structure through international debt shifting. Using a novel subsidiary-level dataset for 558 commercial bank subsidiaries of the 86 largest multinational banks in the world, we find that taxes matter significantly, through both the traditional debt bias channel and the international debt shifting that is due to the international tax differentials. The latter channel is more robust and tends to be quantitatively more important. Our results imply that taxation causes significant international debt spillovers through multinational banks, which has potentially important implications for tax policy.

Taxation and the Financial Crisis

Author: Julian S. Alworth

Publisher: Oxford University Press (UK)

Published: 2012-02-23

Total Pages: 321

ISBN-13: 0199698163

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This book examines how tax policies contributed to the financial crisis; whether taxation can play a role in the reform efforts to establish a sounder and safer financial system; and the pros and cons of various tax initiatives.

Debt, Taxes, and Banks

Author: Mr.Michael Keen

Publisher: International Monetary Fund

Published: 2012-02-01

Total Pages: 32

ISBN-13: 1463937091

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Understanding the impact of the asymmetric tax treatment of debt and equity on the capital structures of financial institutions is critical to shaping and assessing responses to the problem of excessive leverage that underlay the 2009 financial crisis - but there is no empirical evidence to draw on. Guided by a simple model of banks? financing decisions in the presence of both regulatory constraints and tax asymmetries, this paper explores the impact of corporate tax bias on bank leverage, the use of hybrid instruments and regulatory capital ratios for a panel of over 14,000 commercial banks in 82 countries over nine years. On average, the sensitivity of banks? debt choices proves very similar to that of non-financial firms, consistent with rough offsetting of two opposing effects suggested by the theory. As the model predicts, somewhat counter-intuitively, the impact of tax on hybrids is generally weak or insignificant. Responsiveness to taxation varies significantly across banks, however: those holding smaller equity buffers, and larger banks, are noticeably less sensitive to tax.

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

Author:

Publisher:

Published: 2014

Total Pages: 0

ISBN-13: 9789279434419

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This study points to a relation between corporate taxation, bank leverage and costs of financial crises. The authors first estimate the effect of corporate taxation on bank leverage with a series of panel regressions, building on the methodology of Keen and Mooij, but focusing on a sample of 3,000 EU banks using data spanning the period 2001-2011. In a second step, they measure the potential reduction in public finance costs in financial crises that would result from reducing banks' incentives for debt financing compared to equity financing, using an actual bank balance-sheet-based model of costs of systemic crisis (SYMBOL-model) for six EU member states. Finally, they show under which conditions the results hold when varying the sensitivity of leverage to corporate income tax, when asset portfolio risk is adjusted together with bank leverage, and when allowing for increased asset portfolio risk.

Taxing Banks Fairly

Author: Sajid M. Chaudhry

Publisher: Edward Elgar Publishing

Published: 2014-10-31

Total Pages: 204

ISBN-13: 1783476486

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Taxing Banks Fairly offers an ethical perspective on bank taxation and financial stability to complement the traditional political economy approach. It also considers how a bank levy or financial activities tax, could be used to ensure that big banks m

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

Author: Sven Langedijk

Publisher:

Published: 2014

Total Pages: 37

ISBN-13: 9789279434426

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The Taxation and Regulation of Banks

Author: Mr.Michael Keen

Publisher: International Monetary Fund

Published: 2011-08-01

Total Pages: 41

ISBN-13: 1463902174

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The financial crisis has prompted a reconsideration of the taxation of financial institutions, with practice outstripping principle: France, Germany, the United Kingdom and several other European countries have now introduced some form of bank tax, and the U.S. administration has revived its own proposal for such a charge. This paper considers the structure, appropriate rate, and revenue yield of corrective taxation of financial institutions addressed to two externalities, consequent on excessive risk-taking, prominent in the crisis: those that arise when such institutions are simply allowed to collapse, and those that arise when, to avoid the harm this would cause, their creditors are bailed out. It also asks whether corrective taxation or a regulatory capital requirement is the better way to address these concerns. The results suggest a potential role for taxing bank borrowing, perhaps as an adjunct to minimum capital requirements, at marginal rates that rise quite sharply at low capital ratios (but are likely lower when the government cannot commit to its bailout policy), reaching levels higher than those of the bank taxes so far adopted or proposed.

Tax Policy, Leverage and Macroeconomic Stability

Author: International Monetary Fund. Fiscal Affairs Dept.

Publisher: International Monetary Fund

Published: 2016-12-10

Total Pages: 78

ISBN-13: 1498345204

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Risks to macroeconomic stability posed by excessive private leverage are significantly amplified by tax distortions. ‘Debt bias’ (tax provisions favoring finance by debt rather than equity) has increased leverage in both the household and corporate sectors, and is now widely recognized as a significant macroeconomic concern. This paper presents new evidence of the extent of debt bias, including estimates for banks and non-bank financial institutions both before and after the global financial crisis. It presents policy options to alleviate debt bias, and assesses their effectiveness. The paper finds that thin capitalization rules restricting interest deductibility have only partially been able to address debt bias, but that an allowance for corporate equity has generally proved effective. The paper concludes that debt bias should feature prominently in countries’ tax reform plans in the coming years.

Balancing the Regulation and Taxation of Banking

Author: Sajid M. Chaudhry

Publisher: Edward Elgar Publishing

Published: 2015-08-28

Total Pages: 166

ISBN-13: 1785360272

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This concise book gives a unique overview of bank taxation as an alternative or a compliment to prudential regulation or non-revenue taxation. Existing bank taxation is reviewed with a view to eliminating distortions in the tax system, which have incen