International spillover effects of U.S. tax reforms: Evidence from Germany

Abstract

This paper explores the international transmission of U.S. tax shocks. Using structural vector autoregressions, we study the impact on the German economy and on German tax legislation. Our results suggest that, after a U.S. tax cut, German GDP increases only moderately. Positive effects via the income channel outweigh negative effects stemming from price developments. Significant changes in the transmission channels arise by distinguishing between the types of the U.S. tax shock. German tax policy either reacts with diametric measures, or remains passive when considering the whole sample period. For a sample starting in 1980, we find that, in particular, after U.S. corporate income tax cuts, tax reductions are also implemented in Germany.