Corporate Tax Changes and Supply-Chain Partners’ Performance

Abstract

Using the staggered corporate income tax changes across US states, we find that tax increases in states where customers operate significantly reduce their suppliers’ return on assets, and operating and gross profit margins. Such effect is more pronounced for suppliers who have high sales dependence, low market share, and operate in R&D-intensive or non-durable-goods industries. Our evidence suggests that, after tax increases, customers shift part of the increased tax burden onto upstream suppliers who have a high level of dependence on the relationship. However, customer tax cuts have little effects on supplier performance.