PE/PI Workshop: Jaya Wen (HBS)

Jaya Wen (HBS) will present, "Bank Expansion as Tax Policy."

Abstract:
This paper presents evidence that governments use non-tax policies with the objective of collecting more taxes from an expanded tax base. Our setting is county governments in China, and the non-tax policy decision is the opening of local bank branches. We investigate how alleviating credit constraints through enhanced banking access enables firms to secure more loans and expand their operations, which in turn increase their taxable base and tax contributions. The central empirical challenge in such an investigation is the correlation between banking access, economic activity, and tax revenues across firms and settings. To address this challenge, we leverage the 2005 abolition of the agricultural tax in China, which created varying fiscal shortfalls across cities. We use a difference-in-differences approach and compare cities with higher and lower revenue losses pre- and post-reform.Our findings suggest that cities facing larger revenue losses differentially expanded banking access by opening bank branches. More intense exposure drove larger Value Added Tax (VAT) revenues and a larger VAT base, particularly among private firms, which tend to be more credit-constrained than SOEs in China. We document various costs associated with the policy and the characteristics of cities that relied on bank expansion most intensely.