Taxes Under Stress: Bank Stress Tests and Corporate Tax Planning

Abstract

Using US bank stress tests and regression discontinuity, we find that stress tests have unintended consequences of intensifying tax planning and increasing tax avoidance. Stress-test banks increase tax avoidance by accelerating charge-offs, net interest, and non-interest expenses. However, this increase in tax planning is not optimally maximized, leading to lower effective tax planning compared to non-stress-test banks. Banks with a substantial increase in tax avoidance under the Dodd-Frank Act tend to increase their risk, investing in high-risk-weight assets and lending in riskier loan categories. These findings are consistent with tax minimization conditions under added regulatory attention and policy uncertainty.

Keywords: Dodd-Frank Act, Stress Tests, Tax Planning, Tax Avoidance, Regulatory Uncertainty

JEL Classification: G20, G28, H25, H26, M4