Household Debt and the Dynamic Effects of Income Tax Changes
61 Pages Posted: 5 Apr 2014
Date Written: March 28, 2014
Using a long span of expenditure survey data and a new narrative measure of exogenous income tax changes for the United Kingdom, we show that households with mortgage debt exhibit large and persistent consumption responses to changes in their income. Homeowners without a mortgage, in contrast, do not appear to react, with responses not statistically different from zero at all horizons. Splitting the sample by age and education yields more limited evidence of heterogeneity as the distributions of these demographics tend to overlap across housing tenure groups. We interpret our findings through the lens of traditional and more recent theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the economy.
Keywords: Mortgage debt, narrative tax changes, liquidity constraints
JEL Classification: E21, E62, H31
Suggested Citation: Suggested Citation