The International Monetary Fund (IMF) has warned that tax cuts financed through additional government borrowing could contribute to higher interest rates globally and reduce investment in other economies.
The warning comes in a chapter of the IMF's October 2026 World Economic Outlook examining how corporate income-tax policies affect economies beyond national borders.
Corporate Tax Policies Have Global Effects
The IMF said corporate income-tax decisions can create cross-border spillovers through several channels, including the relocation of profits, changes in investment decisions and the movement of knowledge and productive activities.
The report noted that the global economy has changed significantly with the expansion of multinational corporations, increasingly international production networks and the growing importance of intangible assets.
Multinational companies now account for more than 20% of global GDP and around 15% of global corporate profits, according to the report.
Debt-Financed Tax Cuts Could Raise Borrowing Costs
The IMF study highlighted a potential consequence of tax reductions that are funded through higher government borrowing.
According to the researchers, debt-financed tax cuts can put upward pressure on global interest rates. Higher borrowing requirements can compete with private-sector investment for available financing, potentially affecting investment conditions beyond the country implementing the tax reduction.
The report also warned that such policies could contribute to the crowding out of investment in other economies.
Tax Competition Shapes Investment Decisions
Differences in corporate tax rates can influence where multinational companies choose to locate profits and investment.
The IMF's research found that a one-percentage-point increase in a country's corporate income-tax rate relative to rates in other countries was associated with a cumulative decline in foreign direct investment inflows of around 0.5% of GDP over three years.
That relationship highlights the challenge governments face when attempting to attract investment while maintaining sustainable tax revenues.
IMF Backs Stronger Anti-Avoidance Measures
The researchers also emphasised the importance of stronger measures to limit tax avoidance. According to the report, effective anti-avoidance frameworks can help protect public revenues while supporting economic output.
For businesses operating across jurisdictions, changing corporate tax rules and international investment conditions can make financial structuring more complex. Companies assessing such developments may consider International Tax as part of their broader tax and financial planning.
Global Tax Policy Remains Closely Connected
The IMF's findings underline how domestic corporate tax decisions can have consequences beyond national borders.
As governments balance investment incentives, tax revenues and fiscal spending, the impact of borrowing-funded tax policies on interest rates and international capital flows is likely to remain an important issue for policymakers and multinational businesses.