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Post-crisis Fiscal Policy$
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Carlo Cottarelli, Philip Gerson, and Abdelhak Senhadji

Print publication date: 2014

Print ISBN-13: 9780262027182

Published to MIT Press Scholarship Online: September 2015

DOI: 10.7551/mitpress/9780262027182.001.0001

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Has Taxation Contributed to the Crisis?

Has Taxation Contributed to the Crisis?

Chapter:
(p.227) 9 Has Taxation Contributed to the Crisis?
Source:
Post-crisis Fiscal Policy
Author(s):

John Norregaard

Aqib Aslam

Dora Benedek

Thornton Matheson

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262027182.003.0010

This chapter examines how current taxation systems distort the saving and financing behavior of individuals and firms by providing incentives for higher leverage, risk-taking, and the promotion of complicated financial instruments. It considers the channels through which tax policies may have delayed recovery from the 2007 financial crisis and proposes reform measures that should be adopted to eliminate distortions in tax systems and promote economic stability. In particular, the debt bias in corporate finance represents a key tax distortion in most countries. While the costs of debt financing are usually deductible from the corporate income tax base, returns on equity are not. This asymmetry provides a tempting incentive for excessive leverage. The prevalence of low-tax jurisdictions also fosters excessive leverage by providing incentives for tax avoidance, while executive compensation schemes are frequently designed in a way that promotes excessive risk-taking. Finally, favorable tax treatment of homeownership contributed to a housing bubble and unsustainable mortgage-based borrowing.

Keywords:   taxation, saving, financing, incentives, leverage, risk-taking, financial instruments, tax policies, corporate finance, tax avoidance

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