Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2026-04-02
Number: 26-016/VI
Author-Name: Felix Ward
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Casper de Vries
Author-Workplace-Name: Erasmus University Rotterdam
Title: The bank leverage response to tax shield changes
Abstract: Does the preferential tax treatment of debt over equity cause banks to increase their leverage? We construct a novel dataset tracing the evolution of the debt tax shield for banks in advanced economies from 1870 to 2020. Exploiting variation from nearly all changes in banking-sector tax shields since the nineteenth century, we show that a 1 percentage point increase in the tax shield reduces bank capital ratios by 0.25-0.8 percentage points. Our estimates suggest that the tax advantage of debt was an important driver of the rise in bank leverage during the twentieth century.
Classification-JEL: E44, G21, G32  
Keywords: corporate income taxation, debt bias, interest deductibility, financial stability
File-URL: https://papers.tinbergen.nl/26016.pdf
File-Format: application/pdf
File-Size: 2.802.903 bytes
Handle: RePEc:tin:wpaper:20260016