Profit Taxation and Bank Risk Taking

58 Pages Posted: 20 Jan 2021

Date Written: 2021

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.

JEL Classification: G210, G280, H250

Suggested Citation

Kogler, Michael, Profit Taxation and Bank Risk Taking (2021). CESifo Working Paper No. 8830, Available at SSRN: https://ssrn.com/abstract=3768908

Michael Kogler (Contact Author)

University of St. Gallen ( email )

Langgasse 1
St. Gallen, 9008
Switzerland

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