Taxes, Risk Taking, and Financial Stability

Michael Kogler ()

No 2202, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: 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.

Keywords: Pigovian taxes; corporate tax reform; bank risk taking; financial stability (search for similar items in EconPapers)
JEL-codes: G21 G28 H25 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2022-05
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cfn, nep-pbe, nep-pub and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
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http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-2202.pdf (application/pdf)

Related works:
Journal Article: Taxes, risk taking, and financial stability (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2022:02

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