Tax Cuts in Open Economies
AbstractA reduction in income tax rates generates substantial dynamic responses within the framework of the standard neoclassical growth model. The short-run revenue loss after an income 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 the internaional 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 revenue in steady state.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0860.
Date of creation: Mar 2008
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international trade; Heckscher-Ohlin; dynamic macroeconomics; taxation; revenue estimation; Laffer curve;
Other versions of this item:
- Alejandro Cuñat & Szabolcs Deák & Marco Maffezzoli, 2008. "Tax Cuts in Open Economies," Working Papers 332, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Alejandro Cuñat & Szabolcs Deák & Marco Maffezzoli, 2010. "Tax Cuts in Open Economies," DEGIT Conference Papers c015_052, DEGIT, Dynamics, Economic Growth, and International Trade.
- 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
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
This paper has been announced in the following NEP Reports:
- NEP-ACC-2008-06-07 (Accounting & Auditing)
- NEP-ALL-2008-06-07 (All new papers)
- NEP-DGE-2008-06-07 (Dynamic General Equilibrium)
- NEP-MAC-2008-06-07 (Macroeconomics)
- NEP-OPM-2008-06-07 (Open Economy Macroeconomic)
- NEP-PBE-2008-06-07 (Public Economics)
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