Complex organizations, tax policy and financial stability

This paper develops a theory of corporate ownership and leverage of multi- ple firms under a tax-bankruptcy trade-off, allowing for internal bailouts. It then questions whether tax policy contributes to the default of the resulting complex or- ganization. Absent other taxes and non-financial synergies, ownership is irrelevant to firm value. With Intercorporate Dividend Taxes, SPV-like subsidiaries or hori- zontal groups are optimal as they avoid double-taxation while preserving the tax benefits of debt. Adding Thin Capitalization rules makes complex organizations more stable than stand-alone firms. These results suggest to extend both corrective taxes to SPVs so as to promote financial stability.