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The tax system and the financial crisis

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Author Info

  • Vieri Ceriani

    ()
    (Banca d'Italia)

  • Stefano Manestra

    ()
    (Banca d'Italia)

  • Giacomo Ricotti

    ()
    (Banca d'Italia)

  • Alessandra Sanelli

    ()
    (Banca d'Italia)

  • Ernesto Zangari

    ()
    (Banca d'Italia)

Abstract

This paper investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine three cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on the taxation of residential building: while the importance of capital gains taxes is disputed, the deductibility of mortgage interest may have contributed to the financial crisis by creating some of the raw materials for the securitization industry. Second, a narrow perspective on the tax treatment, together with specific provisions, may have fostered performance-based remuneration of managers, resulting in overemphasis of short-term profitability and incentive to excessive risk-taking. Third, the securitization process, which played a key role in the outbreak of the financial crisis, was accompanied by opportunities for tax arbitrage and reduction of the overall tax wedge paid by investors, through offset of incomes that are ordinarily taxed at different rates; a de facto exemption of CDS premiums received by non-residents supplemented the tax arbitrage.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 85.

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Date of creation: Jan 2011
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Handle: RePEc:bdi:opques:qef_85_11

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Keywords: taxation; financial crisis; housing market; stock options; securitization; credit default swaps;

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  1. Paul van den Noord, 2005. "Tax Incentives and House Price Volatility in the Euro Area: Theory and Evidence," Economie Internationale, CEPII research center, issue 101, pages 29-45.
  2. Paul van den Noord & Chistopher Heady, 2001. "Surveillance of Tax Policies: A Synthesis of Findings in Economic Surveys," OECD Economics Department Working Papers 303, OECD Publishing.
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Cited by:
  1. repec:ese:emodwp:em4-12 is not listed on IDEAS
  2. Figari, Francesco & Paulus, Alari & Sutherland, Holly & Tsakloglou, Panos & Verbist, Gerlinde & Zantomio, Francesca, 2012. "Taxing Home Ownership: Distributional Effects of Including Net Imputed Rent in Taxable Income," IZA Discussion Papers 6493, Institute for the Study of Labor (IZA).

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