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Debt, Taxes, and Banks

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  • 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.

Suggested Citation

  • Michael Keen & Ruud A. de Mooij, 2012. "Debt, Taxes, and Banks," IMF Working Papers 12/48, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/48
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    References listed on IDEAS

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    Cited by:

    1. Bas B. Bakker & Giovanni Dell'Ariccia & Luc Laeven & Jérôme Vandenbussche & Deniz O Igan & Hui Tong, 2012. "Policies for Macrofinancial Stability; How to Deal with Credit Booms," IMF Staff Discussion Notes 12/06, International Monetary Fund.
    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. repec:eee:finsta:v:31:y:2017:i:c:p:81-92 is not listed on IDEAS
    4. Cappelletti, Giuseppe & Guazzarotti, Giovanni & Tommasino, Pietro, 2017. "The stock market effects of a securities transaction tax: Quasi-experimental evidence from Italy," Journal of Financial Stability, Elsevier, vol. 31(C), pages 81-92.
    5. Serena Fatica & Thomas Hemmelgarn & Gaëtan Nicodème, 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.
    6. repec:kap:itaxpf:v:24:y:2017:i:5:d:10.1007_s10797-016-9432-1 is not listed on IDEAS
    7. repec:eee:jfinec:v:125:y:2017:i:2:p:266-285 is not listed on IDEAS
    8. Steve Bond & Kyung Yeon Ham & Giorgia Maffini & Andrea Nobili & Giacomo Ricotti, 2016. "Regulation, tax and capital structure: evidence from administrative data on Italian banks," Questioni di Economia e Finanza (Occasional Papers) 361, Bank of Italy, Economic Research and International Relations Area.
    9. Peter Birch Sørensen, 2014. "Taxation and the Optimal Constraint on Corporate Debt Finance," CESifo Working Paper Series 5101, CESifo Group Munich.
    10. Douglas Sutherland & Peter Hoeller & Rossana Merola & Volker Ziemann, 2012. "Debt and Macroeconomic Stability," OECD Economics Department Working Papers 1003, OECD Publishing.
    11. Johannesen, Niels, 2014. "Tax avoidance with cross-border hybrid instruments," Journal of Public Economics, Elsevier, vol. 112(C), pages 40-52.
    12. Peter Birch Sørensen, 2014. "Taxation and the optimal constraint on corporate debt finance," Working Papers 1427, Oxford University Centre for Business Taxation.
    13. 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.
    14. repec:men:journl:v:3:y:2017:i:1:p:5-12 is not listed on IDEAS
    15. repec:eee:jfinin:v:30:y:2017:i:c:p:86-106 is not listed on IDEAS

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