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Fiscal Spillovers: The Case of US Corporate and Personal Income Taxes

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When the United States changes personal or corporate income tax rates, the economic effects are not just contained to that country. They spill over to other countries. However, the size and positive or negative effects of these spillovers are not clear.

We measure the impact of changes to personal and corporate income tax rates in the United States on its trading partners. We follow the methodology introduced by Mertens and Ravn (2013) to first identify unanticipated changes to US tax rates. We then estimate the spillover effects of these changes to Canada and other US trading partners. 

We find that US corporate income tax cuts generally have negative cross-border spillover effects, though these effects are usually small. In Canada, these spillover effects turn positive over the long run. US personal income tax cuts generally have positive and sizable spillover effects that are most pronounced in emerging-market economies without fully flexible exchange rate regimes.