Tax Reform's Impact on Bank and Corporate Cyclicality

Diego Aragon, Anna Kovner, Vanesa Sanchez and Peter Van Tassel

No 20180716, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: The Tax Cuts and Jobs Act (TCJA) is expected to increase after-tax profits for most companies, primarily by lowering the top corporate statutory tax rate from 35 percent to 21 percent. At the same time, the TCJA provides less favorable treatment of net operating losses and limits the deductibility of net interest expense. We explain how the latter set of changes may heighten bank and corporate borrower cyclicality by making bank capital and default risk for highly levered corporations more sensitive to economic downturns.

Keywords: Corporate Finance; Banks; Financial Stability; Taxes (search for similar items in EconPapers)
JEL-codes: H25 (search for similar items in EconPapers)
Date: 2018-07-16
New Economics Papers: this item is included in nep-mac
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