How do corporate tax hikes affect investment allocation within multinationals?

66 Pages Posted: 3 Aug 2020 Last revised: 2 Feb 2023

See all articles by Antonio De Vito

Antonio De Vito

Alma Mater Studiorum University of Bologna

Martin Jacob

WHU - Otto Beisheim School of Management

Dirk Schindler

Erasmus School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Guosong Xu

Rotterdam School of Management, Erasmus University

Date Written: February 2, 2023

Abstract

This paper studies how corporate tax hikes transmit across countries through multinationals’ internal networks of subsidiaries. We build a parsimonious multicountry model to underscore two opposing spillover effects: While tax competition between countries generates positive investment spillover, intra-firm production linkages predict negative spillover. Using subsidiary-level data and exogenous corporate tax hikes, we find that local business units cut investment by 0.4% for a 1% increase in foreign corporate tax. This result highlights the importance of production linkages in propagating foreign tax shocks, as the supply-chain-induced negative spillover dominates the positive spillover effect suggested by the conventional wisdom of tax competition.

Keywords: Tax hike, Investment, Internal networks, Multinationals, Spillover effects

JEL Classification: D25, G11, H32, L14

Suggested Citation

De Vito, Antonio and Jacob, Martin and Schindler, Dirk and Xu, Guosong, How do corporate tax hikes affect investment allocation within multinationals? (February 2, 2023). Available at SSRN: https://ssrn.com/abstract=3643481 or http://dx.doi.org/10.2139/ssrn.3643481

Antonio De Vito

Alma Mater Studiorum University of Bologna ( email )

Bologna
Italy

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Dirk Schindler

Erasmus School of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Guosong Xu (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

Rotterdam
Netherlands

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