An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

David G. Harris
Syracuse University

Emre Kilic
University of Houston

Abstract: This paper examines how banks impound implicit taxes into loan interest rates. Economic theory predicts that the most flexible party bears the least tax cost. We hypothesize that mortgagors, being geographically fixed, are less flexible than banks and bear greater implicit tax costs, and that this effect diminishes when, after 1993, banks competed across state lines. Using data from 1977 to 1996 on banks’ and mortgagors’ state and federal taxes and detailed loan-specific data on mortgage originations, we investigate how interest rates vary separately with banks’ and mortgagors’ taxes. We find that mortgage rates vary positively with both banks’ tax costs and the value of mortgagors’ interest tax deductions. These findings are consistent with banks both passing on their tax costs to borrowers and capturing portions of borrowers’ tax benefits. The estimated annual magnitude of this tax shift is $16.25 billion, which we find declined after 1993 by one-third.

Back to Session Listing

AAA Home Page