How do corporate tax hikes affect investment allocation within multinationals?
66 Pages Posted: 3 Aug 2020 Last revised: 2 Feb 2023
Date Written: February 2, 2023
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
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