Using data from a major U.S. credit bureau, we analyze whether and how cuts in bank income taxation affect the interest rates and size of consumer loans. Exploiting the change in bank corporate income taxation from the Tax Cuts and Jobs Act and utilizing tax-exempt credit unions as a control group, we find that the corporate tax cut leads to lower interest rates for consumers obtaining auto loans from banks. We find reduced rates for high and low credit quality borrowers. We develop a parsimonious model to identify the economic mechanisms of tax incidence in consumer credit markets. Testing the model predictions empirically reveals that the effect of the tax cut declines with banks’ market power and leverage, while we find a limited role for selection in consumer credit markets.
| Speaker: | Dr Fabian Nagel Assistant Professor of Accounting, Stanford University |
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