Profit Taxation and Bank Risk Taking

Michael Kogler ()

No 1918, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: How can tax policy improve financial stability? Recent studies point to large potential stability gains from a reform that eliminates the debt bias in corporate taxation. It is well known that such a reform reduces bank leverage. This paper analyzes a novel, complementary channel: bank risk taking. We model the portfolio choice of banks under moral hazard and thereby emphasize the “incentive function” of equity. We find that (i) an allowance for corporate equity (ACE) and a lower corporate tax rate discourage risk taking and offer stability and welfare gains, (ii) a revenue-neutral introduction of the ACE unambiguously improves financial stability, and (iii) capital regulation and deposit insurance importantly influence the tax sensitivities of bank risk taking.

Keywords: Corporate taxation; tax reform; banking; risk taking; financial stability (search for similar items in EconPapers)
JEL-codes: G21 G28 H25 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2019-12
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-pbe and nep-rmg
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http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-1918.pdf (application/pdf)

Related works:
Working Paper: Profit Taxation and Bank Risk Taking (2021)
Working Paper: Profit Taxation and Bank Risk Taking (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2019:18

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