Economics, Financial Services, Pethokoukis

How the US tax code makes financial crisis more likely

By Tax Credits (CC BY 2.0)

By Tax Credits (CC BY 2.0)

One of the many flaws of the US tax code is its favoritism of debt over equity. It should be neutral. A new IMF report attempts to show the risk of putting a thumb on the scale:

That most corporate tax systems favor debt over equity finance is now widely recognized as, potentially, amplifying risks to financial stability. This paper makes a first attempt to explore, empirically, the link between this tax bias and the probability of financial crisis. It finds that greater tax bias is associated with significantly higher aggregate bank leverage, and that this in turn is associated with a significantly greater chance of crisis. The implication is that tax bias makes crises much more likely, and, conversely, that the welfare gains from policies to alleviate it can be substantial—far greater than previous studies, which have ignored financial stability considerations, suggest.

5 thoughts on “How the US tax code makes financial crisis more likely

  1. Yes, you speak the truth.

    But it would be nice if you could say this to the unconverted who see things differently in a way they might understand and respond favorably to it..

  2. I do notice that Canada does not have a mortgage interest deduction.

    Canada also does not seem to have real estate booms and busts.

    Coincidence? When most Americans think that the ‘tax writeoff’ is a huge freebie, and the best reason to ‘buy’ a house, even though the writeoff only causes home prices to inflate upward to accommodate the same monthly payment that is now pre-tax. perhaps Canada is the smart one.

  3. The Fair Tax answers all of these concerns. I eliminates corporation taxes as well as income taxes and several others like taxes on interest and dividends. So there is no such thing as write offs with the Fair Tax. It encourages savings and punishes debt, just the opposite of our present Tax Code. Let’s get behind the Fair Tax and get it passed into law. It’s HR25, awaiting hearing in the House Ways and Means Committee – Call Chairman David Camp and tell him of your support. See fairtax.org to learn more about it.

  4. Stop taxing income,and tax consumption instead would fix a lot of inefficiencies in the US tax code.A consumption tax has as much of a chance of becoming tax law in the US as this congress working together,not gonna happen.

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