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Profit Taxation and Bank Risk Taking

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  • Kogler, Michael

Abstract

How can tax policy improve financial stability? Recent studies point to large potential stability gains from a reform that eliminates the debt bias in corporate taxation. It is well known that such a reform reduces bank leverage. This paper analyzes a novel, complementary channel: bank risk taking. We model the portfolio choice of banks under moral hazard and thereby emphasize the “incentive function” of equity. We find that (i) an allowance for corporate equity (ACE) and a lower corporate tax rate discourage risk taking and offer stability and welfare gains, (ii) a revenue-neutral introduction of the ACE unambiguously improves financial stability, and (iii) capital regulation and deposit insurance importantly influence the tax sensitivities of bank risk taking.

Suggested Citation

  • Kogler, Michael, 2019. "Profit Taxation and Bank Risk Taking," Economics Working Paper Series 1918, University of St. Gallen, School of Economics and Political Science.
    • Handle: RePEc:usg:econwp:2019:18
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    More about this item

    Keywords

    Corporate taxation; tax reform; banking; risk taking; financial stability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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