A Treasury paper prepared early last year says that improvements to existing tax policies may do more than proposed new bank taxes to make the financial system more stable.The paper by Treasury analyst Shane Johnson cites a number of reforms which could improve stability. They include reducing incentive for corporate debt through new company tax arrangements, and eliminating transaction-based taxes. Several of the reforms have been previously backed by Treasury, some of them in last year's Henry Review of taxation.Some current policies "contribute to excessive leverage, reduced transparency and increased complexity", the paper says. The paper is among those released yesterday after a Freedom of Information request by the Daily Telegraph newspaper.. It says that introducing new taxes to address financial instability is "incongruous" when existing taxes already impose distortions and increase the financial system's complexity. Among the current system's problems:- By allowing interest payments to be deducted from corporate income, the current tax system creates a bias in favour of debt funding.- The current tax system promotes over-investment in debt-financed housing investment.-  By providing concessions in taxation of capital gains, the system creates more distortions.The paper suggests possible change to corporate and personal taxation such as a dual income tax, which taxes capital income more generously, and an allowance for corporate equity, which makes debt less attractive. Both approaches have been tried in parts of Europe.The case for a new tax on financial transactions is weak, it says, as such a tax would probably not increase financial stability.And it argues a tax on financial institutions' liabilities to reflect the cost of government protection for the sector has a number of serious problems. There are likely to be better ways to reduce the cost of protecting the system's stability, it says.Thanks to the Daily Telegraph for the use the following three documents, supplied by Treasury under FOI laws.