How do corporate tax hikes affect investment allocation within multinationals?
74 Pages Posted: 7 Feb 2025
Date Written: December 23, 2024
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
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