THE INTERNATIONAL RAMIFICATIONS OF TAX REFORMS - SUPPLY-SIDE ECONOMICS IN A GLOBAL ECONOMY

This paper studies tax reforms in a dynamic model of a global economy calibrated to current U.S. and European tax policies. World capital ma rkers add consumption-smoothing and income-redistribution effects that alter closed-economy predictions. In the absence of tares on foreign interest, welfare gains of eliminating U.S. income taxes are enlarged by up to 34 percent, at the expense of European losses caused by trans itional declines in consumption and leisure, and a permanent capital o utflow. In contrast, if foreign interest is taxed, the same tax reform reduces U.S. welfare 0.7 percent and increases European welfare 1.8 p ercent.