Tax and the Crisis*

Abstract

Did taxation play any role in precipitating the financial crisis? Are there lessons to be drawn for future tax reform priorities? This paper reviews the main channels by which tax effects might have been felt and which may require forceful attention. These include in particular the large tax biases favouring debt finance and, in some countries, investment in housing. The complexities of national tax codes, and the international interaction between them, have, moreover, encouraged the use of complicated financial instruments and international tax planning, reducing transparency. Tax distortions did not cause the crisis – in the sense that there are no obvious tax changes likely to have triggered it – but they may well have contributed by leading to higher leverage and more complexity than would otherwise have been the case. Most of these distortions have long been a source of concern, but dealing with them may be more important than previously supposed.

Economic crisis and “white informal economy” – a slippery slope

“…Besides the considerable financial losses, the fact that there is an even stronger lack of political interest in these issues, lack of investigative knowledge and lack of proper legislation in regard to dealing with these issues of the white informal economy can present a motivational factor for perpetration of these acts that are financially very rewarding for the perpetrators. The debate we wish to encourage is somewhat similar to that started by Keen et al (2010) or Palan et al (2010) on the role of taxes in crisis. Keen et al (2010) writes that tax distortions have had an impact on the financial crisis as taxes were a strong background factor influencing the behaviour of financial institutions and actors.…”

“…The debate we wish to encourage is somewhat similar to that started by Keen et al (2010) or Palan et al (2010) on the role of taxes in crisis. Keen et al (2010) writes that tax distortions have had an impact on the financial crisis as taxes were a strong background factor influencing the behaviour of financial institutions and actors. The similar discussion by Palan et al (2010) also showed that tax havens and offshore funds (and experts employed there) have significantly helped in the whole questionable securitisation process as their flexibility has speeded up legislation or actually enabled the processes.…”

Can Tax Policy Contribute to the Crisis?

“…In general, the price sensitivity of demand for housing is inversely related to the extent of preferential tax treatment for housing and to the expected rate of house price appreciation. Moreover, [4] note that mortgage interest tax relief encourages the build-up of gross housing debt and there is evidence that countries offering more favorable tax treatment for home ownership do indeed have higher ratios of mortgage debt. There is also evidence that mortgages fell significantly relative to home value (in UK and U.S.) after reforms reduced the value of mortgage interest relief (e.g.…”

Housing, Finance, Policy and the Wider Economy

“…Andrews et al (2011) warn that preferential fiscal treatment of credit-financed housing investment can be reflected in heightened house prices. Keen et al (2010) propose that taxation-induced bias in favor of credit-financed housing investment can put financial stability at risk. Hilber & Turner (2014) emphasize that the tax deductability of mortgage interest payments is capitalized into house prices rather than home ownership attainment, in particular in an environment where housing supply is inflexible.…”