Personal Taxes and Small Business Lending
72 Pages Posted: 29 Apr 2021 Last revised: 17 Jul 2023
Date Written: July 18, 2023
I investigate how local personal income taxes impact small business lending in the U.S. I use the staggered statutory changes of state tax rates as the identification to compare the loans granted in the adjacent counties across state borders using a matched dataset during 2001-2018. I find higher personal income taxes cause more negative loan outcomes, including smaller loan size, shorter maturity, higher default probability and higher charge-off ratio. Higher taxes also lead to smaller aggregate amount and growth rate of small business loans granted. These findings suggest the tax-induced deterioration in borrower creditworthiness constrains local banks’ small business lending.
Keywords: Personal income taxes, state tax policy, banks, loans, small businesses, local credit markets
JEL Classification: G21, G32, H24, H81, J21, L25
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