Corporate Tax Enforcement Externalities and the Banking Sector
58 Pages Posted: 21 Nov 2018 Last revised: 12 Apr 2019
Date Written: April 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 commercial lending to such borrowers. Exploiting the regional structure employed by the IRS between 1992 and 1999 as well as the IRS reorganization in 2000, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth for regionally focused banks. Furthermore, we show that tax enforcement is associated with greater employment by SMEs in counties exposed to higher bank commercial lending. 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