Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/232427 
Authors: 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 8830
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
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.
Subjects: 
corporate taxation
tax reform
banking
risk taking
financial stability
JEL: 
G21
G28
H25
Document Type: 
Working Paper
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