Profit Taxation and Bank Risk Taking
Series
CESifo Working Paper
Type
working paper
Date Issued
2021-01
Author(s)
Abstract (De)
How can tax policy improve financial stability? Recent studies suggest large stability gains from eliminating the debt bias in corporate taxation. It is well known that this reform reduces bank leverage. This paper analyzes a novel, complementary channel: risk taking. We model banks’ portfolio choice under moral hazard and emphasize the ‘incentive function’ of equity. We find that (i) an allowance for corporate equity (ACE) and a lower tax rate discourage risk taking and offer stability and welfare gains, (ii) a revenue-neutral ACE unambiguously improves financial stability, and (iii) capital regulation and deposit insurance influence the risk-taking effects of taxation.
Language
English
HSG Classification
contribution to scientific community
Publisher place
München
Number
8830
Division(s)
Eprints ID
257216