The Effect of Legislated Tax Changes on the Trade Balance: Empirical Evidence for the United States, Germany, and the United Kingdom

Using a narrative account of quarterly discretionary changes in tax liabilities from 1974Q4 to 2018Q2 in a VAR setting, we study whether legislative tax changes affect the trade balance in the US, Germany, and the UK. As legislative tax changes we consider (i) all changes, (ii) personal income tax changes, (iii) business tax changes, (iv) indirect tax changes in Germany and the UK, (v) asymmetric reactions after tax hikes and cuts, and (vi) spillovers of US tax changes into Germany and the UK. Generally, we find that after a reduction in aggregated tax liabilities, exports in the US and the UK react quite similarly and tend to fall, whereas imports tend to rise across all three countries. Consequently—and fostered by growing output—the net-exports-to-GDP ratio decreases, significantly so in the US and UK. When disaggregating the tax shocks, we find similar reactions in the US and UK, whereas for Germany, we often find a symmetric reaction of exports and imports, leaving the NEX-to-GDP ratio unchanged. However, employing normal variations of the tax changes as a yardstick, the economic magnitude of the estimated effects on the trade variables is not particularly large.