Chapter

Moving beyond the Crisis: Tax Policies for the Soundness of Financial Markets

Geoff Lloyd

in Taxation and the Financial Crisis

Published in print February 2012 | ISBN: 9780199698165
Published online May 2012 | e-ISBN: 9780191738630 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199698165.003.0008

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Systemic tax biases in favour of corporate debt financing and investment returns in the form of capital gains may have strengthened non-tax incentives to greater leverage, greater risk taking, and a lack of transparency, which were among the root causes of the financial crisis. Such tax biases were in each case exacerbated by increased tax arbitrage activity, tax-driven structured finance, and use of tax havens, facilitated by globalization and financial innovation. While this activity may in part have disappeared as a result of the significant losses incurred by financial institutions, other tax-related asymmetries may come to dominate behaviour in coming years. As part of an overall strategic response to the financial crisis, there is a case for identifying well-targeted reforms that might reduce or remove the incentives to financial instability caused inadvertently by common features of national tax systems. An appendix discusses the tax implications of financial institutions’ losses.

Keywords: tax; financial crisis; leverage; risk taking; transparency; debt financing; capital gains; tax arbitrage; tax haven; financial institutions; losses

Chapter.  9949 words.  Illustrated.

Subjects: Financial Markets

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