The Real Effects of Bank Taxation

Abstract

The extent to which banks benefit or retard the development of the real economy has been brought into sharp focus since the global financial crisis. Government interventions and policies aimed at containing excessive risks in the banking industry are likely to have implications for funding conditions facing corporates and their resultant strategic investment decisions. Utilising the sudden imposition of a bank-specific gross profit tax, we investigate whether taxation of the banking industry matters for real economic outcomes of corporate borrowers. Using a large sample of matched listed corporates and banks in Japan, we find that banks with a greater tax exposure reduce lending more than less exposed counterparts. Moreover, the imposition of bank taxes reduces credit supply, and leads corporates to reduce levels of investment. These results suggest that taxation of the banking industry propagates in a negative fashion to the real economy by altering the environment in which corporates operate.

Keywords: Tokyo Bank Tax, Firm Investment, Tax Distortions, Tax Exposure, Bank Lending