Working Paper: CEPR ID: DP7666
Authors: Thomas Hemmelgarn; Gaetan Nicodeme
Abstract: The 2008 financial crisis is the worst economic crisis since the Great Depression of 1929. It has been 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. This paper discusses the interactions between tax policy and the financial crisis. In particular, it reviews the existing evidence on the links between taxes and many characteristics of the crisis. Finally, it examines some possible future tax options to prevent such crises.
Keywords: financial crisis; financial transaction tax; property tax; stimulus; taxation
JEL Codes: E62; F21; F30; G10; H20; H30; H50; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax incentives favoring home ownership (H20) | Housing demand (R21) |
| Housing demand (R21) | Speculative bubble (E32) |
| Tax policy (H29) | Speculative bubble (E32) |
| Favorable tax treatment of debt financing (G32) | Increased leverage among firms (G32) |
| Increased leverage among firms (G32) | Heightened risk exposure during economic downturns (F65) |
| Favorable tax treatment of stock options (H20) | Short-term risk-taking among executives (G34) |
| Financial transaction tax (F38) | Decreased market volatility (G19) |