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Corporate Taxation, Leverage, and Macroeconomic Stability

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  • Franziska Bremus
  • Jeremias Huber

Abstract

A key challenge for economic policy today is to make the financial system more resilient. The literature finds that high indebtedness (or: leverage), both in the financial and in the real sectors, is a danger to macroeconomic stability and growth. Moreover, the design of the corporate tax system is an important determinant of leverage: in many countries interest paid on debt is tax-deductible while the return on equity is not, such that tax systems incentivize debt-type financing and, hence,leveraging. This article summarizes the debate about the implications of corporate taxation for leverage and economic stability. Proposals for addressing the debt bias of taxation are also presented.

Suggested Citation

  • Franziska Bremus & Jeremias Huber, 2016. "Corporate Taxation, Leverage, and Macroeconomic Stability," DIW Roundup: Politik im Fokus 93, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwrup:93en
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    References listed on IDEAS

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    1. European Commission, 2014. "Tax reforms in EU Member States - 2014 Report," Taxation Papers 48, Directorate General Taxation and Customs Union, European Commission.
    2. Jennifer Blouin & Harry Huizinga & Luc Laeven & Gaëtan Nicodème, 2013. "Thin capitalization rules and multinational firm capital structure," Working Papers 1323, Oxford University Centre for Business Taxation.
    3. Thomas Hemmelgarn & Daniel Teichmann, 2014. "Tax reforms and the capital structure of banks," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 645-693, August.
    4. Heider, Florian & Ljungqvist, Alexander, 2015. "As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes," Journal of Financial Economics, Elsevier, vol. 118(3), pages 684-712.
    5. Ruud A. De Mooij, 2012. "Tax Biases to Debt Finance: Assessing the Problem, Finding Solutions," Fiscal Studies, Institute for Fiscal Studies, vol. 33(4), pages 489-512, December.
    6. European Commission, 2015. "Tax reforms in EU Member States - 2015 Report," Taxation Papers 58, Directorate General Taxation and Customs Union, European Commission.
    7. aus dem Moore, Nils, 2014. "Taxes and Corporate Financing Decisions – Evidence from the Belgian ACE Reform," Ruhr Economic Papers 533, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    8. repec:zbw:rwirep:0533 is not listed on IDEAS
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    Cited by:

    1. Bofinger, Peter & Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Wieland, Volker, 2018. "Vor wichtigen wirtschaftspolitischen Weichenstellungen. Jahresgutachten 2018/19 [Setting the Right Course for Economic Policy. Annual Report 2018/19]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201819.
    2. Bremus, Franziska & Schmidt, Kirsten & Tonzer, Lena, 2020. "Interactions between bank levies and corporate taxes: How is bank leverage affected?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 118.
    3. Franziska Bremus & Kirsten Schmidt & Lena Tonzer, 2018. "Interactions between Regulatory and Corporate Taxes: How Is Bank Leverage Affected?," Discussion Papers of DIW Berlin 1757, DIW Berlin, German Institute for Economic Research.
    4. Portal, Márcio Telles & Laureano, Luis, 2017. "Does Brazilian allowance for corporate equity reduce the debt bias? Evidences of rebound effect and ownership-induced ACE clientele," Research in International Business and Finance, Elsevier, vol. 42(C), pages 480-495.

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