A reduction in capital tax rates generates substantial dynamic responses within the frame-
work of the standard neoclassical growth model. The short-run revenue loss after a tax cut
is partly – or, depending on parameter values, even completely – offset by growth in the
long-run, due to the resulting incentives to further accumulate capital. We study how the
dynamic response of government revenue to a tax cut changes if we allow a Ramsey econ-
omy to engage in international trade: the open economy’s ability to reallocate resources
between labor-intensive and capital-intensive industries reduces the negative effect of fac-
tor accumulation on factor returns, thus encouraging the economy to accumulate more
than it would do under autarky. We explore the quantitative implications of this intuition
for the US in terms of two issues recently treated in the literature: dynamic scoring and
the Laffer curve. Our results demonstrate that international trade enhances the response
of government revenue to tax cuts by a relevant amount. In our benchmark calibration,
a reduction in the capital-income tax rate has virtually no effect on government revenues
in steady state.
Keywords: International Trade; Heckscher-Ohlin; Dynamic Macroeconomics; Taxa-
tion; Revenue Estimation; Laffer Curve.