Tax incidence in loan pricing

• DOI: 10.1016/j.jacceco.2021.101418
• Publication Date: 2021-04-21T18:42:26Z
• Authors: Ya Kang; Oliver Zhen Li; Yupeng Lin
• Keywords: 0502 economics and business; 05 social sciences; 1. No poverty

Abstract We investigate tax incidence reflected in the pricing of syndicated loans and argue that loan spread increases in bank income taxes of borrowers’ home states. We compare borrowers in states with differing bank tax rates and demonstrate the presence of tax incidence on borrowers with causality coming from bank taxes. Tax incidence on borrowers increases with local loan market concentration and pre-existing lending relationships. Further, a lack of tax deductibility of loan loss provisions enhances tax incidence. We conclude that bank income taxation, though specifically targeted at banks, is partially passed through to borrowers and increases their cost of debt.