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Is bank capital sensitive to a tax allowance on marginal equity?

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  • Jose Martin‐Flores
  • Christophe Moussu

Abstract

This paper studies how bank capital changes following the implementation and removal of a tax incentive on equity. We examine the impact of the introduction of a tax allowance in Italy granted to banks (and other firms) that increase their equity from a base year. Using a difference‐in‐differences setting, we observe an 8.83% increase in bank capital ratios following the implementation of this reform. When this tax mechanism is phased out, we observe an opposite effect on the equity ratio, showing the absence of a hysteresis effect in bank capital. We document a heterogeneous effect for large and small banks.

Suggested Citation

  • Jose Martin‐Flores & Christophe Moussu, 2019. "Is bank capital sensitive to a tax allowance on marginal equity?," European Financial Management, European Financial Management Association, vol. 25(2), pages 325-357, March.
    • Handle: RePEc:bla:eufman:v:25:y:2019:i:2:p:325-357
    DOI: 10.1111/eufm.12163
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    References listed on IDEAS

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    Cited by:

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    2. Kogler, Michael, 2019. "Profit Taxation and Bank Risk Taking," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203533, Verein für Socialpolitik / German Economic Association.
    3. Shafik Hebous & Alexander Klemm, 2020. "A destination-based allowance for corporate equity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 753-777, June.
    4. Gawehn, Vanessa, 2019. "Banks and corporate income taxation: A review," arqus Discussion Papers in Quantitative Tax Research 247, arqus - Arbeitskreis Quantitative Steuerlehre.

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