How Do Corporate Tax Hikes Affect Investment Allocation within Multinationals?

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

No 10272, CESifo Working Paper Series from CESifo

Abstract: This paper studies how corporate tax hikes transmit across countries through multinationals’ internal networks of subsidiaries. We build a parsimonious multicountry model to underscore 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 0.4% 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 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cfn, nep-int, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10272

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