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

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  • Nicodème, Gaëtan
  • Langedijk, Sven
  • Rossi, Alessandro
  • Pagano, Andrea

Abstract

Corporate income taxation (CIT) in most countries favors debt over equity financing, leading to over-indebtedness. This problem is particularly acute for the financial sector. We estimate financial-stability benefits of eliminating this debt bias. We estimate the long-run effects of CIT on bank leverage and, using a Vasicek-based model of banking crisis losses, we find that eliminating this debt bias could reduce public finance losses in the range of 30 to 70%. These results hold even for conservative estimates of bank-leverage and portfolio-risk effects of CIT changes.

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  • Nicodème, Gaëtan & Langedijk, Sven & Rossi, Alessandro & Pagano, Andrea, 2015. "Debt Bias in Corporate Income Taxation and the Costs of Banking Crises," CEPR Discussion Papers 10616, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10616
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    Cited by:

    1. Stephanie Guichard, 2017. "10 Years after the Global Financial Crisis: What Have We Learnt About International Capital Flows?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-30, October.
    2. Schuknecht, Ludger, 2019. "Fiscal-financial vulnerabilities," SAFE White Paper Series 62, Leibniz Institute for Financial Research SAFE.
    3. Serena Fatica & Wouter Heynderickx & Andrea Pagano, 2020. "Banks, Debt And Risk: Assessing The Spillovers Of Corporate Taxes," Economic Inquiry, Western Economic Association International, vol. 58(2), pages 1023-1044, April.
    4. Michael Kogler, 2023. "Taxes, risk taking, and financial stability," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(5), pages 1043-1068, October.
    5. Bremus, Franziska & Schmidt, Kirsten & Tonzer, Lena, 2020. "Interactions between bank levies and corporate taxes: How is bank leverage affected?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 118.
    6. 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.
    7. Bofinger, Peter & Schnabel, Isabel & Feld, Lars P. & Schmidt, Christoph M. & Wieland, Volker, 2015. "Zukunftsfähigkeit in den Mittelpunkt. Jahresgutachten 2015/16 [Focus on Future Viability. Annual Report 2015/16]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201516.
    8. Bellucci, Andrea & Fatica, Serena & Heynderickx, Wouter & Kvedaras, Virmantas & Pagano, Andrea, 2023. "Liability taxes, risk, and the cost of banking crises," Journal of Corporate Finance, Elsevier, vol. 79(C).

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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