A 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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0860.
Alejandro Cuñat & Szabolcs Deák & Marco Maffezzoli, 2008.
"Tax Cuts in Open Economies,"
Working Papers
332, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
[Downloadable!]
Find related papers by 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 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:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
James E. Anderson & Eric van Wincoop, 2004.
"Trade Costs,"
Journal of Economic Literature,
American Economic Association, vol. 42(3), pages 691-751, September.
[Downloadable!] (restricted)
Other versions:
James E. Anderson & Eric van Wincoop, 2004.
"Trade Costs,"
NBER Working Papers
10480, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)