Tax Policy, Leverage and Macroeconomic Stability
October 12, 2016
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Summary
This paper presents new evidence of the extent of debt bias, including estimates for banks and non-bank financial institutions both before and after the global financial crisis. It presents policy options to alleviate debt bias, and assesses their effectiveness. The paper finds that thin capitalization rules restricting interest deductibility have only partially been able to address debt bias, but that an allowance for corporate equity has generally proved effective. The paper concludes that debt bias should feature prominently in countries’ tax reform plans in the coming years.
Subject: Borrowing, Corporate sector, Debt, Financial sector, Financial stability, Nonbank financial sector, Private sector, Tax policy
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Policy Papers
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