Bank Leverage and the Tax Advantage of Debt
-
SeriesBrown Bag Seminars General Economics
-
Speaker
-
FieldMacroeconomics
-
LocationErasmus University Rotterdam, E building, Kitchen/Lounge E1
Rotterdam -
Date and time
April 25, 2024
12:00 - 13:00
Abstract
Does the preferential tax treatment of debt vis-à-vis equity cause banks to increase their leverage? We compile a novel dataset that allows us to study the evolution of the tax advantage of debt in advanced economies from 1870 to 2017. Based on nearly the entirety of advanced-economy tax shield changes since the nineteenth century we show that a 1 percentage point increase (ppt) in the tax shield elicits state-dependent capital ratio responses in the -0.2 to -0.6 ppt range. This implies that the preferential tax treatment of debt was an important contributor to the increase in bank leverage over the twentieth century. Joint paper with Jose Castillo and Casper de Vries.