Taxes Under Stress : Bank Stress Tests and Corporate Tax Avoidance

We investigate the impact of mandatory transparency disclosure requirements on tax avoidance in US bank holding companies. We use the implementation of the Dodd-Frank bank stress tests as our identification strategy. Using regression discontinuity to exploit the quasi-experimental properties of the regulation around the bank-size policy thresholds, we find evidence of tax avoidance and aggressive tax planning in stress-test banks resulting in a 0.48 to 1.3 percentage point reduction in cash tax paid relative to non-stress test banks. Banks with a large surge in tax avoidance post-Dodd-Frank tend to be riskier, as reflected by increases in risk-weighted assets, investments in high-risk-weight assets, and lending in riskier loans. We find that bank stress tests and the added regulatory attention have the unintended consequences of increasing tax policy uncertainty and the smoothing of bank-specific tax risks (volatility of cash effective tax rates) which leads to higher tax avoidance. These findings are consistent with tax minimization conditions in banking under added regulatory attention