Work

How do corporate tax hikes affect investment allocation within multinationals?

Year: 2025

Type: article

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.

Source: European Finance Review

DOI: 10.1093/rof/rfaf006

Authors: Antonio De Vito, Martin Jacob, Dirk Schindler, Guosong Xu