Tax cuts in open economies
- Author(s)
- Alejandro Cunat, Szabolcs Deák, Marco Maffezzoli
- 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.
- Organisation(s)
- Department of Economics
- External organisation(s)
- University of Exeter, Università Commerciale Luigi Bocconi
- Journal
- Review of Economic Dynamics
- Volume
- 45
- Pages
- 83-108
- No. of pages
- 26
- ISSN
- 1094-2025
- DOI
- https://doi.org/10.1016/j.red.2021.05.001
- Publication date
- 2021
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502003 Foreign trade, 502018 Macroeconomics
- Keywords
- ASJC Scopus subject areas
- Economics and Econometrics
- Portal url
- https://ucris.univie.ac.at/portal/en/publications/tax-cuts-in-open-economies(a42d20ae-9b1e-4a77-a6dd-90b292b10067).html