Tax Reform, Consumption and Asset Structure

Abstract:     
This paper tries out a variety of approaches to examine three questions. How did the major Swedish tax reform of 1991, which implied lower tax rates and a sharp increase in real after-tax borrowing rates, affect aggregate consumption? How did the tax reform affect household savings composition? To what extent did the portfolio adjustments differ across taxpayers? Our main conclusions are as follows. Although the tax reform coincided with the exceptional consumption bust of the early 1990s, tax factors most likely played a minor role. To the extent that the tax reform mattered, capitalization effects in the housing market is the most plausible mechanism. However, on the asset side there was a strong incentive to shift from nonfinancial to financial savings outlets, and aggregate data suggest that households responded to these incentives. Our microeconomic evidence, building on survey data on the asset holdings of individual households, indicates somewhat surprisingly that most tax clientele effects had vanished already before the tax reform.

JEL Classification: E21, D12, G11, G18, H31

working papers series