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.
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