3 Feb 2010

2008 Financial Crisis and Taxation Policy: Exploring the Nexus

A paper recently published under the aegis of European Commission examines the interactions between tax policy and the 2008 financial crisis which was "characterised by a housing bubble in a context of rapid credit expansion, high risk-taking and exacerbated financial leverage, leading to deleveraging and credit crunch when the bubble burst". The authors have undertaken a review of "existing evidence on the links between taxes and many characteristics of the crisis" to conclude that "available evidence is mixed when it comes to assess whether different tax treatments have led to different price developments, suggesting that lax monetary policy and increased risk-taking by lenders are more powerful explanations for the housing bubble".

Nonetheless the tax policies are to be blamed in as much it is noted that "risk-taking behaviour may have been exacerbated by tax provisions on the treatment of executive compensation and by tax arbitrage possibilities across different types of investors, albeit both relationships still need to be empirically validated." In all the paper provides an interesting insight in the various tax variables affecting the crisis. Have a look.

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