How do corporate tax hikes affect investment allocation within multinationals?

74 Pages Posted: 7 Feb 2025

See all articles by Antonio De Vito

Antonio De Vito

Alma Mater Studiorum University of Bologna

Martin Jacob

University of Navarra, IESE Business School

Dirk Schindler

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

Guosong Xu

Rotterdam School of Management, Erasmus University

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

Suggested Citation

De Vito, Antonio and Jacob, Martin and Schindler, Dirk and Xu, Guosong, How do corporate tax hikes affect investment allocation within multinationals? (December 23, 2024). Available at SSRN: https://ssrn.com/abstract=5069516 or http://dx.doi.org/10.2139/ssrn.5069516

Antonio De Vito (Contact Author)

Alma Mater Studiorum University of Bologna ( email )

Bologna
Italy

Martin Jacob

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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

Rotterdam School of Management, Erasmus University ( email )

RSM Erasmus University
PO Box 1738
Rotterdam, 3062 PA
Netherlands

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