How do tax increases affect investment allocation within multinationals?

49 Pages Posted: 3 Aug 2020 Last revised: 13 Apr 2021

See all articles by Antonio De Vito

Antonio De Vito

IE Business School - IE University

Martin Jacob

WHU - Otto Beisheim School of Management

Guosong Xu

Rotterdam School of Management, Erasmus University

Date Written: April 12, 2021

Abstract

This paper studies how tax increases transmit across countries through multinationals’ internal networks of subsidiaries. Using a large subsidiary-level dataset of European firms and several exogenous tax hikes, we find that local business units cut capital investment in response to foreign tax increases. We document two channels that propagate these shocks through firms’ internal networks: production linkages among subsidiaries and financial constraints. In the aggregate, domestic investment and employment decline with higher exposure to foreign tax increases, suggesting that tax increases in one country can spill over to other foreign countries.

Keywords: Tax hike, investment, internal networks, spillover effects

JEL Classification: D25, G11, H32, L14

Suggested Citation

De Vito, Antonio and Jacob, Martin and Xu, Guosong, How do tax increases affect investment allocation within multinationals? (April 12, 2021). Available at SSRN: https://ssrn.com/abstract=3643481 or http://dx.doi.org/10.2139/ssrn.3643481

Antonio De Vito

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

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

Guosong Xu (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

Rotterdam
Netherlands

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