Bilateral Tax Treaties and GDP Comovement

Using a 30-year panel of quarterly GDP fluctuations from of a broad set of countries, we demonstrate that the signing of a bilateral tax treaty increases the comovement of treaty partners’ business cycles by 1/2 a standard deviation. This effect of fiscal policy is as large as the effect of trade linkages on comovement, and stronger than the effects of several other common financial and investment linkages. We also show that bilateral tax treaties increase comovement in shocks to nations’ GDP trends, demonstrating the permanent effects of coordination on fiscal policy rules. We estimate trend and business cycle components of nations’ output series using an unobserved-components model in order to measure comovement between countries, and then estimate the impact of tax treaties using generalized estimating equations. JEL Classificaitons: H32, H87, F42, E62 ∗Much of the work on this project was conducted while Nicholas Sly was visiting CESifo, and he would like to thank the institute for its generous support. We would also like to thank Jeremy Piger for assistance at early stages. We have benefited from conversations with Céline Azémar, Steve Bond, Ron Davies, Peter Egger, Tim Goodspeed, Makoto Hasagawa, Jim Hines, Jean Imbs, Steven Lehrer, Joel Slemrod, Jeffrey Smith and Silvana Tenreyro, as well as conference participants at the National Tax Association meetings, International Institute of Public Finance Congress and Banque de France and seminar participants at Oxford University, CESifo, Paris School of Economics, University of Michigan and Queens University. Thanks to Laura Kawano and Joel Slemrod for generously providing corporate tax rate data. Also, we wish to acknowledge the very capable research assistance provided by Erin Weld. We are grateful to the University of Oregon Foundation for providing funds to purchase data on bilateral tax treaties from Thomas Reuters. All remaining errors are the responsibility of the authors.