Spillovers from tax shocks to the Euro area

Abstract

Abstract I study the spillover effects of legislated discretionary tax changes in the USA, Germany, and the UK to a panel of eleven Eurozone countries for the period 1980Q1–2018Q4 employing Local Projections. When considering aggregated tax shocks, I find little evidence for significant spillovers. When allowing for state-dependent effects, I find no effects of German or US tax cuts regardless of the state of the business cycle. When allowing for asymmetric effects, there is, in general, evidence for negative (positive) spillovers from US, German, and UK tax hikes (UK tax cuts). US tax hikes always cause adverse spillovers, whereas the effects for Germany and the UK are state dependent. When considering country-specific effects, the effects turn out as heterogeneous across the Eurozone countries. UK tax cuts are generally expansionary, whereas US (German) tax cuts cause positive spillovers mainly during recessionary (non-recessionary) times.