Corporate Tax Enforcement Externalities and the Banking Sector

56 Pages Posted: 21 Nov 2018 Last revised: 20 May 2019

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: May 2019

Abstract

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

Gallemore, John and Jacob, Martin, Corporate Tax Enforcement Externalities and the Banking Sector (May 2019). 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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