Working Paper: CEPR ID: DP9649
Authors: James Cloyne; Paolo Surico
Abstract: 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.
Keywords: liquidity constraints; mortgage debt; narrative tax changes
JEL Codes: E21; E62; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous income tax changes (H31) | household consumption (mortgagors) (D14) |
| exogenous income tax changes (H31) | household consumption (outright homeowners) (D10) |
| exogenous income tax changes (H31) | household consumption (social renters) (D10) |