Discussion Paper Details

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

Author(s): Sven Langedijk, Gaëtan Nicodème, Andrea Pagano and Alessandro Rossi

Publication Date: May 2015

Keyword(s): capital structure, debt bias, public finance, systemic risk and taxation

Programme Area(s): Financial Economics and Public Economics

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.

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Bibliographic Reference

Langedijk, S, Nicodème, G, Pagano, A and Rossi, A. 2015. 'Debt Bias in Corporate Income Taxation and the Costs of Banking Crises'. London, Centre for Economic Policy Research.