https://macropaperwarehouse.com/authors/raul-razo-garcia/Raúl Razo-GarcíaHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/the-welfare-and-distributional-consequences-of-corporate-tax-cuts-in-open-economies/https://macropaperwarehouse.com/papers/the-welfare-and-distributional-consequences-of-corporate-tax-cuts-in-open-economies/<p>This paper uses an open-economy heterogeneous-household model with incomplete markets to evaluate the welfare and distributional consequences of the U.S. Tax Cuts and Jobs Act (TCJA) of 2017 — which reduced the U.S. corporate tax rate from 35 to 21 percent — both within the U.S. and in affected trading partners. The model features three economies (the U.S., a small open economy calibrated to Canada, and the rest of the world), free capital flows, progressive income taxes, and idiosyncratic uninsurable labor income shocks generating empirically realistic wealth Gini coefficients (0.80 for the U.S., 0.70 for Canada). Three main results are established. First, the TCJA is regressive in the U.S. — under a permanent cut, the bottom 5 percent of U.S. households by wealth experience welfare losses of 0.10–0.26 percent of lifetime consumption, while the top 1 percent gain 0.92 percent — and generates an even more regressive outcome in trading partners, where approximately the bottom 80 percent of the small open economy&rsquo;s wealth distribution experience welfare losses averaging 1.28 percent at the bottom decile against gains of 2.57 percent at the top. Second, whether U.S. wealth-poor households benefit depends critically on the persistence of the tax cut: under a permanent cut, households above approximately the bottom 5 percent of the U.S. wealth distribution gain (driven by wage increases from capital inflows), but under an anticipated partial reversal from 21 to 28 percent after 7 years, approximately the bottom 75 percent of U.S. households experience welfare losses because the temporary wage gain is dominated by a persistent increase in the public debt burden. Third, when the small open economy reciprocates by matching the U.S. corporate tax reduction to 21 percent, the domestic distributional consequence reverses: all wealth quintiles in the small open economy gain (Table 5, Panel B shows gains of 0.52–1.19 percent across all groups), with the gain being roughly progressive within the SOE — a result driven by the wage increase from capital inflows exceeding the financing cost, which falls primarily on the wealth-rich through higher top marginal tax rates.</p>