Corporate Tax Enforcement Externalities and the Banking Sector

53 Pages Posted: 21 Nov 2018 Last revised: 6 Dec 2018

See all articles by John Gallemore

John Gallemore

University of Chicago - Booth School of Business

Martin Jacob

WHU - Otto Beisheim School of Management

Date Written: December 2018

Abstract

Governments around the world are considering increasing corporate tax enforcement efforts to mitigate base erosion and improve revenue. Whether such enforcement efforts have externalities is not well known. In this study, we examine whether corporate tax enforcement can affect banks via their corporate lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their governance and information environments, which in turn could lead to greater commercial loan growth and better lending decisions. Exploiting the regional structure employed by the IRS between 1992 and 1999, we find that the corporate tax audit probability for SMEs is associated with greater commercial lending growth and loan portfolio quality for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to a federal-based system in 2000 as an exogenous change to tax enforcement at the district level. Our findings are consistent with the tax authority’s mandate having important externalities on the banking sector via the latter’s commercial lending, and suggest that the benefits to tax enforcement go beyond simply improving tax collection.

Keywords: tax authority, tax enforcement, bank lending

JEL Classification: G21, G28, H23, H25, M41

Suggested Citation

Gallemore, John and Jacob, Martin, Corporate Tax Enforcement Externalities and the Banking Sector (December 2018). Available at SSRN: https://ssrn.com/abstract=3274786 or http://dx.doi.org/10.2139/ssrn.3274786

John Gallemore (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

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