22 While the point estimates reported in the previous section remain robust to extending the definition of investment hubs, the effects are now measured more precisely due to the increased variation in our main explanatory variable. In Model 1 and 2, we estimate the effect of concluding double tax treaties with investment hub and non-investment hub locations. We include a set of time-specific fixed effects in the second specification. Regardless of the approach, we do find sizeable negative effects of investment hub treaties on government revenues in source countries (-22 percent) but no additional effect on investment. The negative revenue effect for non-investment hub treaties is smaller (-3 percent) but also significant at the 5 percent and 1 percent levels. Notably, the estimation results indicate that revenue losses are significantly larger when the treaty partner country is an investment hub.

The estimation of a dynamic model with least squares introduces bias to all estimated coefficients (Nickel, 1970).<sup>35</sup> In the third specification, we thus examine whether our results are biased by the inclusion of lagged FDI values. To do so, we use FDI inflows as a share of GDP as our dependent variable but continue to use the same set of explanatory variables. The substitution of dependent variables does not affect our findings: DTTs do not impact investments significantly but reduce government revenue. The negative revenue effect remains considerably larger for investment hub treaties than for others.

In the fourth specification, we quantify the impact of DTTs on general income tax revenue, which includes personal income tax revenue and corporate income tax revenue. This measure is potentially less precise, as we expect the most direct effect on corporate taxes. However, by using a more aggregate revenue measure, we increase the number of observations by roughly 50 percent, from 614 to 918. Our results indicate that general income tax revenue decreases by 19.8 percent in response to each treaty concluded with an investment hub and by 0.9 percent in response to other treaties.

**<u>Table 4. Results for Investment Hubs and Robustness checks</u>**

|SUR Estimation w<br>Dependent|ith GLS|Log (Inve|stment)|||Log (Tax|Revenue)||
|---|---|---|---|---|---|---|---|---|
|Explanatory|Model 1|Model 2|Model 3|Model 4|Model 1|Model 2|Model 3|Model 4|
|Investment hub<br>treaty|0.001|-0.001|-0.003|0.001|-0.237***|-0.217***|-0.257***|-0.198***|
||[0.018]|[0.020]|[0.005]|[0.018]|[0.071]|[0.073]|[0.071]|[0.074]|
|Non-investment|||||||||
|hub treaty|0.007|0.005|0.001|0.007|-0.026**|-0.035***|-0.027**|-0.009|
||[0.005]|[0.005]|[0.001]|[0.005]|[0.011]|[0.011]|[0.012]|[0.008]|
|Controls|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Time fixed<br>effects|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Observations|1190|1190|1158|1156|617|617|617|918|

*, **, and *** indicate significance at the 10%, 5%, and 1% level. All specifications include the same set of explanatory variables as the last specification of the baseline results. Models 1 and 2 test for a broader definition of investment hubs, Model 3 investigates dynamic bias, and Model 4 quantifies effects on total income tax revenue. Heteroscedasticity and autocorrelation robust standard errors in square brackets.

35 However, the bias vanishes with increasing time observations and our panel covers up to 25 years.