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Review of Finance Vol. 29 No. 2 2025

How do corporate tax hikes affect investment allocation within multinationals?

Antonio De Vito1; Martin Jacob2; Dirk Schindler3,4,5,6; Guosong Xu7

1 Department of Management, Alma Mater Studiorum University of Bologna, Via Capo di Lucca 34, Bologna, Italy · 2 Accounting and Control Department, IESE Business School, 08034 Barcelona, Spain · 3 Erasmus School of Economics, Erasmus University Rotterdam, P.O. box 173, 3000 DR, Rotterdam, The Netherlands · 4 NoCeT, NHH Norwegian School of Economics, Helleveien 30, 5045 Bergen, Norway · 5 Tinbergen Institute, Burg. Oudlaan 50, 3062 PA Rotterdam The Netherlands · 6 CESifo, Poschingerstr. 5, 81679, Munich, Germany · 7 Department of Finance, Rotterdam School of Management, Erasmus University Rotterdam, Burgemeester Oudlaan 50, 3062 PA, Rotterdam, The Netherlands

open access

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.

DOI
10.1093/rof/rfaf006
Volume
29
Issue
2
Pages
531-565
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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