How do corporate tax hikes affect investment allocation within multinationals?

Antonio De Vito, Martin Jacob, Dirk Schindler and Guosong Xu

Review of Finance, 2025, vol. 29, issue 2, 531-565

Abstract: This article 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 percent for a 1 percent 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 (search for similar items in EconPapers)
JEL-codes: D20 D25 H32 L14 (search for similar items in EconPapers)
Date: 2025
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Working Paper: How Do Corporate Tax Hikes Affect Investment Allocation within Multinationals? (2023)
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