TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, December 5, 2018

Corporate Tax Enforcement Externalities And The Banking Sector

John Gallemore (Chicago) & Martin Jacob (WHU), Corporate Tax Enforcement Externalities and the Banking Sector:

Governments around the world are considering increasing corporate tax enforcement efforts to mitigate base erosion and improve revenue. Whether such enforcement efforts have externalities is not well known. In this study, we examine 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 information environments, which in turn could lead to better lending decisions and greater commercial loan growth. Exploiting the regional structure employed by the IRS between 1992 and 1999, we find that the corporate tax audit probability for SMEs is associated with greater loan portfolio quality and 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.

Our findings are consistent with the tax authority’s mandate having important externalities on the banking sector via the latter’s commercial lending, and suggest that the benefits to tax enforcement go beyond simply improving tax collection.

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