Personal Income Taxes and Small Business Lending

78 Pages Posted: 29 Apr 2021 Last revised: 4 May 2021

See all articles by Weichao Wang

Weichao Wang

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Date Written: April 26, 2021

Abstract

I investigate whether and how personal income taxes impact bank lending to small businesses. My empirical design exploits staggered statutory changes of state personal tax in the U.S. as identification and compares loans granted in geographically adjacent counties across state borders with relative tax changes during 2001-2018. I find that higher personal tax rate has significantly negative effects on loan outcomes, including smaller loan size, shorter maturity, higher default probability and higher charge-off ratio. I further find significantly smaller number and amount of small business loans in high-tax localities. These novel evidences suggest personal tax-induced distortion in borrower’s creditworthiness constrains local banks’ lending to small businesses.

Keywords: Personal income taxes, banks, loans, loan contract terms, small businesses

JEL Classification: G21, G32, H24, H81, J21, L25

Suggested Citation

Wang, Weichao, Personal Income Taxes and Small Business Lending (April 26, 2021). Available at SSRN: https://ssrn.com/abstract=3836142 or http://dx.doi.org/10.2139/ssrn.3836142

Weichao Wang (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Botafogo, 22231-010
Rio de Janeiro, RJ 22231-010
Brazil
+552130832726 (Phone)
+552130832726 (Fax)

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