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

61 Pages Posted: 16 Jun 2021

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Sascha Mierzwa

University of Marburg - School of Business & Economics

Date Written: June 14, 2021

Abstract

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 United States, Germany, and the United Kingdom. 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) spillovers of US tax changes into Germany and the UK, and (vi) asymmetric reactions after tax hikes and cuts. Generally, we find that after a reduction in aggregated tax liabilities, imports and exports in the US and Germany react quite similarly: imports tend to rise; exports do not change much. Consequently—and fostered by growing output—the net-exports-to-GDP ratio decreases. We find no clear net effect in the UK. Instead, UK imports only increase after cuts to indirect taxes. 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. Thus, there remain doubts as to whether tax policy is an effective in-strument for addressing trade imbalances.

Keywords: Fiscal policy, tax policy, legislated tax changes, trade balance, exports, imports, United States, Germany, United Kingdom, VAR, narrative approach

JEL Classification: E62, F41, H30, K34

Suggested Citation

Hayo, Bernd and Mierzwa, Sascha, The Effect of Legislated Tax Changes on the Trade Balance: Empirical Evidence for the United States, Germany, and the United Kingdom (June 14, 2021). Available at SSRN: https://ssrn.com/abstract=3866701 or http://dx.doi.org/10.2139/ssrn.3866701

Bernd Hayo (Contact Author)

University of Marburg - School of Business & Economics ( email )

Universitaetsstr. 24
Marburg, D-35032
Germany
++49(0)6421-28-23091 (Phone)
++49(0)6421-28-23193 (Fax)

Sascha Mierzwa

University of Marburg - School of Business & Economics ( email )

Universitätsstrasse 24
D-35032 Marburg, D-35032
Germany

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