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The Great RecessionLessons for Central Bankers$
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Jacob Braude, Zvi Eckstein, Stanley Fischer, and Karnit Flug

Print publication date: 2013

Print ISBN-13: 9780262018340

Published to MIT Press Scholarship Online: January 2015

DOI: 10.7551/mitpress/9780262018340.001.0001

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Tax Policies and Financial Stability: Lessons from the Crisis

Tax Policies and Financial Stability: Lessons from the Crisis

Chapter:
(p.123) 5 Tax Policies and Financial Stability: Lessons from the Crisis
Source:
The Great Recession
Author(s):

Helene Schuberth

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262018340.003.0006

While taxes were not the major cause of the financial crisis, the biases embedded in the current tax systems may have exacerbated the crisis and might play a greater role in future crises unless tax systems are thoroughly reformed. The chapter first examines the key channels through which tax policies have contributed to vulnerabilities of the financial and nonfinancial sectors, in particular high leverage and high risk-taking. The best-known example is the favourable tax treatment of owner-occupied housing together with mortgage interest relief. Other examples include the preferential treatment of debt over equity, the different treatment of interest, dividends and capital gains, as well as international tax arbitrage opportunities. The second part of the chapter discusses the rationale of various taxes that are supposed to internalize negative externalities stemming from financial sector activities, to align private incentives with the social cost of activities. The chapter critically evaluates the corrective potential of those taxes and discusses the relative merits of, and complementarities between taxation and regulation. In general, if taxes are properly designed, there is a strong case for using them as an instrument of macroprudential policy.

Keywords:   Financial stability, Housing, Tax bias, Capital gains, Tax arbitrage, Macroprudential policy

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