Abstract
We investigate the international propagation of tax rate shocks originating in the United States using a global vector error-correction model (GVAR). We identify shocks to corporate and personal income tax rates by using narrative series as external instruments, following the proxy-SVAR methodology. The main results of the paper are the following: (1) the domestic effects of corporate tax shocks are stronger than those of personal income tax shock; (2) spillovers are in most cases positive and significant, albeit of small size; (3) the boost to exports in recipient economies, stimulated both by stronger US demand and by real exchange rate depreciation vis-a-vis the US dollar, is the main transmission channel; financial channels (through long-term interest rates) also play a role.
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