Profit Taxation and Bank Risk Taking

Michael Kogler ()

No 8830, CESifo Working Paper Series from CESifo

Abstract: 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.

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)
Date: 2021
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba, nep-cfn, nep-pbe, nep-pub and nep-rmg
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Profit Taxation and Bank Risk Taking (2019)
Working Paper: Profit Taxation and Bank Risk Taking (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8830

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