The Role of Housing Tax Provisions in the 2008 Financial Crisis

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, ending into deleveraging and credit crunch when the bubble burst. This paper discusses the interactions between housing tax provisions and the financial crisis. In particular, it reviews the existing evidence on the links between capital gains taxation of houses, interest mortgage deductibility and characteristics of the crisis.financial crisis, tax policy, housing, interest deductibility, capital gains

The tax system and the financial crisis

This paper investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine three cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on the taxation of residential building: while the importance of capital gains taxes is disputed, the deductibility of mortgage interest may have contributed to the financial crisis by creating some of the raw materials for the securitization industry. Second, a narrow perspective on the tax treatment, together with specific provisions, may have fostered performance-based remuneration of managers, resulting in overemphasis of short-term profitability and incentive to excessive risk-taking. Third, 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.taxation, financial crisis, housing market, stock options, securitization, credit default swaps

The Role of Housing Tax Provisions

The 2008 financial crisis has been the worst economic crisis since the Great Depression of 1929. It has been characterized by a housing bubble in a context of rapid credit expansion, high risk-taking, and exacerbated financial leverage, ending in deleveraging and a credit crunch when the bubble burst. This chapter discusses the interactions between housing tax provisions and the financial crisis. In particular, it reviews the existing evidence on the links between capital gains taxation of houses, interest mortgage deductibility, and characteristics of the crisis.SCOPUS: ch.binfo:eu-repo/semantics/publishe

An Econometric Analysis of the Employment and Revenue Effects of the Treu Reform in the Period 1997-2001

An employment package (EP), reducing the social security taxes (SC) and increasing labour flexibility, was introduced in Italy by the centre-left Government in 1997. We show econometrically that EP had positive effect also on the SC revenue. Using time series techniques, with data 1980-1996, we estimate a model of labour market implicitly based on the old SC regime and assess the hypothetical level of employment without EP for 1997-2001. We, thus, determine the difference between the actual SC-revenues and SC-revenues without EP. This difference results positive and increasing through time, showing a peculiar Laffer effect.

The tax system and the financial crisis

This paper investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine three cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on the taxation of residential building: while the importance of capital gains taxes is disputed, the deductibility of mortgage interest may have contributed to the financial crisis by creating some of the raw materials for the securitization industry. Second, a narrow perspective on the tax treatment, together with specific provisions, may have fostered performance-based remuneration of managers, resulting in overemphasis of short-term profitability and incentive to excessive risk-taking. Third, 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

The tax system and the financial crisis

This paper investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine three cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on the taxation of residential building: while the importance of capital gains taxes is disputed, the deductibility of mortgage interest may have contributed to the financial crisis by creating some of the raw materials for the securitization industry. Second, a narrow perspective on the tax treatment, together with specific provisions, may have fostered performance-based remuneration of managers, resulting in overemphasis of short-term profitability and incentive to excessive risk-taking. Third, 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.taxation, financial crisis, incentives, housing, bonuses