Corporate Tax Enforcement Externalities and the Banking Sector

66 Pages Posted: 21 Nov 2018 Last revised: 9 Jul 2020

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: July 2020

Abstract

We explore whether corporate tax enforcement can affect bank lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their information environments, which in turn could lead to increased 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 federal system in 2000 as an exogenous change to tax enforcement at the district level. Further results show that tax enforcement’s impact on SME informational environments is at least partially responsible for this association: the impact of tax auditing on bank lending is stronger for banks facing greater informational disadvantages and in areas where SMEs face greater hold-up problems. Finally, we find that the tax audit rate is positively associated with loan portfolio quality, suggesting that tax enforcement can lead to better loan decisions. Our findings are consistent with the tax authority’s mandate having important externalities on bank lending and SME access to capital, 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 (July 2020). 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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