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Tax Reform's Impact on Bank and Corporate Cyclicality

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Abstract

The Tax Cuts and Jobs Act (TCJA) is expected to increase after-tax profits for most companies, primarily by lowering the top corporate statutory tax rate from 35 percent to 21 percent. At the same time, the TCJA provides less favorable treatment of net operating losses and limits the deductibility of net interest expense. We explain how the latter set of changes may heighten bank and corporate borrower cyclicality by making bank capital and default risk for highly levered corporations more sensitive to economic downturns.

Suggested Citation

  • Diego Aragon & Anna Kovner & Vanesa Sanchez & Peter Van Tassel, 2018. "Tax Reform's Impact on Bank and Corporate Cyclicality," Liberty Street Economics 20180716, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87265
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    File URL: https://libertystreeteconomics.newyorkfed.org/2018/07/tax-reforms-impact-on-bank-and-corporate-cyclicality.html
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    More about this item

    Keywords

    Corporate Finance; Banks; Financial Stability; Taxes;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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