Corporate Tax Enforcement Externalities and the Banking Sector
53 Pages Posted: 21 Nov 2018 Last revised: 6 Dec 2018
Date Written: December 2018
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: Suggested Citation