Taxes and the Global Spillovers of AI Investments

Abstract

Artificial Intelligence (AI) is transforming businesses and the technological frontier, yet its cross-border spillovers remain understudied. Using a novel panel dataset, we find that AI investment strongly propagates internationally in the form of growth in foreign subsidiaries' assets, employment, and revenues. We construct a measure of European country-industry exposure to U.S. firms' AI investments and document significant spillovers of U.S.-originating AI investment into European industries. However, these effects vary with local tax policies: European countries with attractive R&D tax incentives experience faster, larger AI-driven growth, while low corporate tax rates further amplify revenue spillovers. To test the mechanisms behind these results, we exploit variation within U.S. firms across their foreign subsidiaries. Spillovers occur because U.S. firms not only expand capital inputs and output, but also increase their labor productivity, R&D activities, and market presence, particularly in foreign markets with attractive corporate tax regimes, following AI adoption. Our findings highlight the role of fiscal policy in shaping AI diffusion and offer new insights into how digital-era investments influence global economic growth.

Keywords: AI investment, intangible assets, growth, tax policy, tax competition, real effects of taxation