Corporate Tax Enforcement Externalities and the Banking Sector
56 Pages Posted: 21 Nov 2018 Last revised: 20 May 2019
Date Written: May 2019
We explore 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 bank commercial lending. Exploiting the regional structure employed by the IRS until 1999, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth 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. Furthermore, we show that this association is greater for banks facing information disadvantages, suggesting that the tax enforcement’s impact on SME information environments is at least partially responsible for our findings. Our findings are consistent with the tax authority’s mandate having important externalities on the banking sector via the latter’s commercial lending, suggesting that the benefits to tax enforcement go beyond improving tax collection.
Keywords: tax authority, tax enforcement, bank lending
JEL Classification: G21, G28, H23, H25, M41
Suggested Citation: Suggested Citation