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Debt, Taxes, and Banks

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Author Info

  • Michael Keen
  • Ruud A. de Mooij

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/48.

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Length: 32
Date of creation: 01 Feb 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/48

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Related research

Keywords: Commercial banks; Corporate taxes; Economic models; tax rate; capital requirement; deposit insurance; corporate tax; bank capital; bank assets; corporate tax rate; bank size; tier 1 capital; deposit insurance coverage; corporate tax rates; tax policy; tier 2 capital; bank regulation; interest payments; tax incentive; return on assets; statutory corporate tax rates; rate of return; business taxes; measure of profitability; capital regulation; risk exposure; bank policy; ownership structure; statutory tax rate; business taxation; investment banks; banking; return on equity; financial risk; bank earnings;

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References

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  1. Reint Gropp & Florian Heider, 2010. "The Determinants of Bank Capital Structure," Review of Finance, European Finance Association, vol. 14(4), pages 587-622.
  2. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, 03.
  3. Alfons Weichenrieder & Tina Klautke, 2008. "Taxes and the Efficiency Costs of Capital Distortions," CESifo Working Paper Series 2431, CESifo Group Munich.
  4. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  5. De Haan, Jakob & Poghosyan, Tigran, 2012. "Bank size, market concentration, and bank earnings volatility in the US," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 35-54.
  6. Demirguc-Kunt, Asli & Karacaovali, Baybars & Laeven, Luc, 2005. "Deposit insurance around the world : a comprehensive database," Policy Research Working Paper Series 3628, The World Bank.
  7. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2013. "Capital structure choice and company taxation: A meta-study," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2850-2866.
  8. Gordon, Roger H., 2010. "Taxation And Corporate Use Of Debt: Implications For Tax Policy," National Tax Journal, National Tax Association, vol. 63(1), pages 151-74, March.
  9. Asl? Demirgüç-Kunt & Edward J. Kane & Luc Laeven (ed.), 2008. "Deposit Insurance around the World: Issues of Design and Implementation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042541, December.
  10. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  11. Slemrod, Joel, 2009. "Lessons for Tax Policy in the Great Recession," National Tax Journal, National Tax Association, vol. 62(3), pages 387-97, September.
  12. Huang, Rongbing & Ritter, Jay R., 2009. "Testing Theories of Capital Structure and Estimating the Speed of Adjustment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(02), pages 237-271, April.
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Citations

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Cited by:
  1. Douglas Sutherland & Peter Hoeller & Rossana Merola & Volker Ziemann, 2012. "Debt and Macroeconomic Stability," OECD Economics Department Working Papers 1003, OECD Publishing.
  2. European Commission, 2013. "Tax reforms in EU Member States - Tax policy challenges for economic growth and fiscal sustainability – 2013 Report," Taxation Papers 38, Directorate General Taxation and Customs Union, European Commission.
  3. Serena Fatica & Thomas Hemmelgarn & Gaetan Nicodeme, 2013. "The Debt-Equity Tax Bias: Consequences and Solutions," Reflets et perspectives de la vie économique, De Boeck Université, vol. 0(1), pages 5-18.
  4. Douglas Sutherland & Peter Hoeller, 2012. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics," OECD Economics Department Working Papers 1006, OECD Publishing.

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