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Tax Cuts in Open Economies

Author

Listed:
  • Alejandro Cunat

    (Universitat Wien)

  • Szabolcs Deak

    (University of Exeter)

  • Marco Maffezzoli

    (University Commerciale Luigi Bocconi)

Abstract
A reduction in capital tax rates generates substantial dynamic responses within the framework of the standard neoclassical growth model. The short-run revenue loss after a tax cut is partly — or, depending on parameter values, even completely — offset by growth in the long-run, due to the resulting incentives to further accumulate capital. We study how the dynamic response of government revenue to a tax cut changes if we allow a Ramsey economy to engage in international trade: the open economy's ability to reallocate resources between labor-intensive and capital-intensive industries reduces the negative effect of factor accumulation on factor returns, thus encouraging the economy to accumulate more than it would do under autarky. We explore the quantitative implications of this intuition for the US in terms of two issues recently treated in the literature: dynamic scoring and the Laffer curve. Our results demonstrate that international trade enhances the response of government revenue to tax cuts by a relevant amount. In our benchmark calibration, a reduction in the capital-income tax rate has virtually no effect on government revenues in steady state. (Copyright: Elsevier)

Suggested Citation

  • Alejandro Cunat & Szabolcs Deak & Marco Maffezzoli, 2022. "Tax Cuts in Open Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 83-108, July.
    • Handle: RePEc:red:issued:18-52
    DOI: 10.1016/j.red.2021.05.001
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    Cited by:

    1. Zanetti Francesco, 2012. "The Laffer Curve in a Frictional Labor Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-23, September.

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    More about this item

    Keywords

    International Trade; Heckscher-Ohlin; Dynamic Macroeconomics; Taxation; Revenue Estimation; Laffer Curve;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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