Taxes and International Risk Sharing

We examine the extent to which differences in international tax rates may account for the small correlations of per capita consumption fluctuations across countries. Theory implies a close relationship between relative consumption growth, and consumption and capital income tax rate differentials. We...

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Bibliographic Details
Published in:Policy File 2014
Main Authors: Epstein, Brendan, Mukherjee, Rahul, Ramnath, Shanthi P
Format: Report
Language:English
Subjects:
Banking/Finance
Economic policy
The Federal Reserve Board
Online Access:Request full text
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Summary:We examine the extent to which differences in international tax rates may account for the small correlations of per capita consumption fluctuations across countries. Theory implies a close relationship between relative consumption growth, and consumption and capital income tax rate differentials. We find strong empirical evidence for this re-lationship. Idiosyncratic output fluctuations account for the majority of cross country consumption growth variability, but trends in tax differentials are informative about the dynamic evolution of international risk sharing. In particular, adjusting for capital taxes reveals an intuitive positive relationship between financial connectedness and risk sharing that is absent in baseline measures.