How do corporate tax hikes affect investment allocation within multinationals?

Abstract

This paper studies how corporate tax hikes transmit across countries through multinationals’ internal networks of subsidiaries. We build a parsimonious multicountry model to highlight 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 0.5% 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: D20, D25, H32, L14