The Welfare and Distributional Consequences of Corporate Tax Cuts in Open Economies

Abstract We develop an open‐economy heterogeneous household model with incomplete markets to quantitatively evaluate the welfare and distributional effects—both within and across countries—of the corporate tax cut (Tax Cuts and Jobs Act, TCJA) implemented in the U.S. in 2017. The model allows for examining outcomes under various possibilities including the tax cut in the U.S. being permanent versus temporary and potential fiscal responses of other countries to the TCJA. We find that the TCJA is regressive in the U.S. and has relatively more regressive outcomes in other countries. Whether the wealth‐poor in the U.S. benefit from the TCJA or not depends on the persistence of the tax cut. Finally, when a small country reduces its corporate tax in response to the TCJA, it has a progressive distributional result in its own economy.