Reducing the Corporate Tax Rate Could Stabilize Banks – NYTimes.com
In the paper, the authors look at statutory tax rate changes over a 12-year period in 87 countries to see how those rate changes affected banks’ capital structure. They find that a 10 percentage point increase (or decrease) in tax rates is associated with a 0.98 percentage point increase (or decrease) in the amount of debt in the capital structure. The authors control for a number of variables that would tend to affect capital structure, lik
e bank size, regulatory requirements, overall economic environment, availability of deposit insurance, and so on. The authors also find that dividend payouts increase after a rate change, further reducing the equity on the balance sheet. Their findings are consistent with prior research, although the magnitude of the effect is a bit smaller.
But we should not scoff at the magnitude of the result. The implication is that reducing the United States corporate tax rate from 35 percent to 25 percent would lead to an average increase in bank equity of about 1 percentage point — to about 12 percent equity, from 11 percent.