DP9649 Household Debt and the Dynamic Effects of Income Tax Changes

Author(s): James Cloyne, Paolo Surico
Publication Date: September 2013
Keyword(s): liquidity constraints, mortgage debt, narrative tax changes
JEL(s): E21, E62, H31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9649

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 tax changes. Home-owners 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 only 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 real economy.