DIVIDEND TAX CUT, BANK CREDIT SUPPLY, AND THE REAL ECONOMY

Abstract

After the 2003 dividend tax cut, C-corporation-banks whose investors are subject to the dividend tax had a higher loan growth rate than S-subchapter-banks. The tax cut impacted the economy through the credit supply channel. Small businesses had more access to C-bank debt financing, increasing the supply of commercial/industrial loans and boosting entrepreneurship. More households obtained mortgage approvals from C-banks and low income, female, or minority applicants benefited more. This tax-induced mortgage growth could potentially explain the housing boom-bust cycle around 2007. C-banks also issued more personal loans to individuals and households after the tax cut, expanding the consumption sectors.