The Review of Economics and Statistics 2025

Local Corporate Taxes and the Geography of Foreign Multinationals

Jianpeng Deng¹; Chong Liu²; Zi Wang³; Yuan Zi⁴

¹ College of Business, Shanghai University of Finance and Economics [email protected] · ² School of Economics, Peking University [email protected] · ³ Hong Kong Baptist University [email protected] · ⁴ Graduate Institute of International and Development Studies (IHEID)&CEPR [email protected]

Abstract

We study the implications of the presence of foreign multinationals on regional corporate tax policies of a country. We develop and estimate a quantitative spatial model with multinational production (MP) and local corporate taxes. Exploiting China's 2008 corporate tax reform, we find that firm production across regions is twice as footloose as estimates in the literature on cross-country production. Counterfactual analysis shows that (i) China's 2008 corporate tax reform shifted foreign-firm productions to western provinces and increased Chinese welfare by 0.86%; (ii) regional tax competition would significantly reduce China's corporate tax revenue, lowering the welfare by 5.56%; (iii) the nationally optimal corporate tax schedule would increase Chinese welfare by 3.10%. Finally, without the presence of foreign multinationals, the welfare loss from regional tax competition would be 2.04%, while the gain from the nationally optimal corporate taxes would be only 0.06%.

DOI

10.1162/rest.a.279

Pages

1-45

Language

en

Sources

crossref openalex