The Role of Taxes in Compensation Schemes and Structured Finance

Vieri Ceriani, Stefano Manestra, Giacomo Ricotti and Alessandra Sanelli

in Taxation and the Financial Crisis

Published in print February 2012 | ISBN: 9780199698165
Published online May 2012 | e-ISBN: 9780191738630 | DOI:

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This chapter investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine two specific cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on certain aspects of the tax treatment of performance-based remuneration of managers, which, coupled with other provisions, may have fostered an ever-increasing use of these instruments, resulting in overemphasis of short-term profitability and incentive to excessive risk taking. Second, the securitization process, which played a key role in the outbreak of the financial crisis, was accompanied by opportunities for tax arbitrage and reduction of the overall tax wedge paid by investors, through offset of incomes that are ordinarily taxed at different rates; a de facto exemption of CDS premiums received by non-residents supplemented the tax arbitrage.

Keywords: taxation; financial crisis; stock options; securitization; credit default swaps

Chapter.  13546 words.  Illustrated.

Subjects: Financial Markets

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