Corporate Income Tax and Bank Leverage: Bank Leverage in the 2010s

Sammanfattning: This paper studies the impact of corporate income taxation on leverage ratios (debts as a share of total assets) in the banking sector across 102 countries for the period 2012-2021, aiming to replicate the 2013 IMF paper ‘Taxation, Bank Leverage, and Financial Crises’ by Keen, De Mooij and Orihara. With a sample of 5,829 banks, a system GMM is used, together with a fixed effects model to compare the two estimators and enable comparison with previous studies. Results are found to be highly dependent on the choice of estimator, with no significance in the GMM model, whereas connections between tax rates and leverage are found with the OLS approach. The strongest determinant of leverage ratios is found to be the size of the bank, defined as the log of total assets. Due to the lack of significance in the GMM model and concerns about the validity of the OLS results on the part of possible endogeneity, this paper finds no convincing support for the impact of corporate tax rates on the leverage ratios of banks between 2012-2021.