Consumption Responses and Redistributive Implications of Luxury Durable Tax Rebates

Tax rebates are popular fiscal tools during economic downturns. This paper investigates policy implications of tax rebates on durables in a context that durables are luxury goods. It uses a large-scale car tax rebate scheme in 2011 in Thailand as a case study, and explores policy implications under the framework of stochastic dynamic model with heterogeneous agents where a car has a dual role of durable goods and illiquid asset. In model parameter estimation, an emphasis is placed on pinning down parameters governing household intertemporal decision and elasticity of intertemporal substitution (EIS). The proposed model can replicate large consumption responses and cutbacks in future consumption following the stimulus. EIS are also estimated to be high among Thai households and heterogeneous across income and age groups--- in line with empirical evidence. The policy predictions and welfare analysis of alternative tax rebate programs are also evaluated.