Debt Bias in Corporate Income Taxation and the Costs of Banking Crises

Nicodème, Gaëtan, Sven Langedijk, Alessandro Rossi and Andrea Pagano
Authors registered in the RePEc Author Service: Gaetan J.A. Nicodeme

No 10616, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Corporate income taxation (CIT) in most countries favors debt over equity financing, leading to over-indebtedness. This problem is particularly acute for the financial sector. We estimate financial-stability benefits of eliminating this debt bias. We estimate the long-run effects of CIT on bank leverage and, using a Vasicek-based model of banking crisis losses, we find that eliminating this debt bias could reduce public finance losses in the range of 30 to 70%. These results hold even for conservative estimates of bank-leverage and portfolio-risk effects of CIT changes.

Keywords: Capital structure; Debt bias; Public finance; Systemic risk; Taxation (search for similar items in EconPapers)
JEL-codes: G01 G28 G32 H25 (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-cfn and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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