Taxes, Risk Taking, and Financial Stability
Series
Discussion Paper
Type
working paper
Author(s)
Abstract (De)
After the global financial crisis, the use of taxes to enhance financial stability received new attention. This paper compares two ways of taxing bank leverage, namely, an allowance for corporate equity (ACE), which addresses the debt bias in corporate taxation, and a Pigovian tax on bank debt (bank levy). We emphasize financial stability gains driven by lower bank asset risk and develop a principal-agent model, in which risk taking depends on the bank's capital structure and, by extension, on the tax treatment of debt and equity because of moral hazard. We find that (i) the ACE unambiguously reduces risk taking, (ii) bank levies reduce risk taking if they are independent of bank performance but may be counterproductive otherwise, (iii) high corporate tax rates render the bank levies less effective, and (iv) taxes are especially effective if capital requirements are low.
Language
English
HSG Profile Area
SEPS - Economic Policy
Publisher
SEPS-HSG
Number
2022-02
Pages
35
Division(s)
Eprints ID
266806
File(s)![Thumbnail Image]()
Name
EWP-2202.pdf
Size
502.89 KB
Format
Adobe PDF
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