The Role of Taxes in Compensation Schemes and Structured Finance

Abstract

This chapter investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine two specific cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on certain aspects of the tax treatment of performance-based remuneration of managers, which, coupled with other provisions, may have fostered an ever-increasing use of these instruments, resulting in overemphasis of short-term profitability and incentive to excessive risk taking. Second, the securitization process, which played a key role in the outbreak of the financial crisis, was accompanied by opportunities for tax arbitrage and reduction of the overall tax wedge paid by investors, through offset of incomes that are ordinarily taxed at different rates; a de facto exemption of CDS premiums received by non-residents supplemented the tax arbitrage.

Regulation and Taxation of the Financial Markets

“…But given the myopic nature of bank creditors and the general perspective of a government bailout, creditors tend to be content with lower interest rates and do not press for additional governance strings to be attached. This in turn leads to excess profits on the side of the bank which both shareholders and managers will share between them: shareholders get higher dividends, bankers get higher bonuses 88 . Against this background legislative developments around the globe -within the ambit of the G20 and their Financial Stability Board 89 , the European Union and the Federal Republic of Germany -have created in recent years what Klaus Hopt aptly has called a framework of "debtholder governance" 90 , meaning a set of rules for boards and managers which aims specifically at securing the rights of debtholders in addition to the mainstream set of rules benefitting shareholders under general corporate law.…”

The stock market effects of a securities transaction tax: Quasi-experimental evidence from Italy

“…For example, preexisting tax distortions may have contributed to the build-up of the excesses that ultimately triggered the crisis, such as excessive risk-taking and leverage, in ‡ated asset prices, the spread of structured …nance (e.g. Keen et al, 2010, Keen and de Moji 2012, Keen et al 2013, Ceriani et al, 2012. Furthermore, the crisis highlighted serious externalities and asymmetric information problems in the …nancial system, therefore suggesting a possible role for properly-designed corrective taxes (Keen, 2010, Shakleford et al, 2010, Perotti and Suarez, 2011.…”