Taxes and International Risk Sharing

46 Pages Posted: 2 Aug 2014

See all articles by Brendan Epstein

Brendan Epstein

Board of Governors of the Federal Reserve System - Advanced Foreign Economies Section

Rahul Mukherjee

Graduate Institute of International and Development Studies (IHEID) - Department of Economics

Shanthi Ramnath

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Date Written: June 10, 2014

Abstract

We examine the extent to which differences in international tax rates may account for the small correlations of per capita consumption fluctuations across countries. Theory implies a close relationship between relative consumption growth, and consumption and capital income tax rate differentials. We find strong empirical evidence for this relationship. Idiosyncratic output fluctuations account for the majority of cross country consumption growth variability, but trends in tax differentials are informative about the dynamic evolution of international risk sharing. In particular, adjusting for capital taxes reveals an intuitive positive relationship between financial connectedness and risk sharing that is absent in baseline measures.

Keywords: International risk sharing, business cycle accounting, taxes

JEL Classification: F41, F44, H29

Suggested Citation

Epstein, Brendan and Mukherjee, Rahul and Ramnath, Shanthi, Taxes and International Risk Sharing (June 10, 2014). FRB International Finance Discussion Paper No. 1110. Available at SSRN: https://ssrn.com/abstract=2474841 or http://dx.doi.org/10.2139/ssrn.2474841

Brendan Epstein (Contact Author)

Board of Governors of the Federal Reserve System - Advanced Foreign Economies Section ( email )

Washington, DC 20551
United States

Rahul Mukherjee

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

Shanthi Ramnath

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

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