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Journal Articles
March 2010 (Blackwell Publishing)
Tax and the crisis
Type: Journal Articles
Authors: Michael Keen, Alexander Klemm and Victoria Perry
ISSN: Print 0143-5671 Online: 1475-5890
Volume, issue, pages: Vol. 31, No. 1, pp. 43 - 79
JEL classification: H20, H21, H87, F55

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Did taxation play any role in precipitating the financial crisis? Are there lessons to be drawn for future tax reform priorities? This paper reviews the main channels by which tax effects might have been felt and which may require forceful attention. These include in particular the large tax biases favouring debt finance and, in some countries, investment in housing. The complexities of national tax codes, and the international interaction between them, have, moreover, encouraged the use of complicated financial instruments and international tax planning, reducing transparency. Tax distortions did not cause the crisis - in the sense that there are no obvious tax changes likely to have triggered it - but they may well have contributed by leading to higher leverage and more complexity than would otherwise have been the case. Most of these distortions have long been a source of concern, but dealing with them may be more important than previously supposed.

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Government departments used IFS research to inform decision-marking about a temporary cut in VAT.