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Do Household Finances Constrain Unconventional Fiscal Policy?

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  • Scott R. Baker
  • Lorenz Kueng
  • Leslie McGranahan
  • Brian T. Melzer

Abstract

When the zero lower bound on nominal interest rate binds, monetary policy makers may lack traditional tools to stimulate aggregate demand. We investigate whether “unconventional” fiscal policy, in the form of preannounced consumption tax changes, has the potential to meaningfully shift durables purchases intertemporally and how it is affected by consumer credit. In particular, we test whether car sales react in anticipation of future sales tax changes, leveraging 57 preannounced changes in state sales tax rates from 1999 to 2017. We find evidence for substantial tax elasticities, with car sales rising by more than 8% in the month before a 1% increase in the sales tax rate. Responses are heterogeneous across households and sensitive to supply of credit. Consumers with high credit risk scores are most able to pull purchases forward. At the same time, other effects such as customer composition and attention lead to even greater tax elasticity during recessions, despite these credit frictions. We discuss policy implications and the likely magnitudes of tax changes necessary for any substantive long-term responses.

Suggested Citation

  • Scott R. Baker & Lorenz Kueng & Leslie McGranahan & Brian T. Melzer, 2019. "Do Household Finances Constrain Unconventional Fiscal Policy?," Tax Policy and the Economy, University of Chicago Press, vol. 33(1), pages 1-32.
  • Handle: RePEc:ucp:tpolec:doi:10.1086/703225
    DOI: 10.1086/703225
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    Cited by:

    1. Shoji, Toshiaki, 2022. "Menu costs and information rigidity: Evidence from the consumption tax hike in Japan," Journal of Macroeconomics, Elsevier, vol. 72(C).
    2. Alisdair McKay & Johannes F. Wieland, 2019. "Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy," NBER Working Papers 26175, National Bureau of Economic Research, Inc.
    3. Scott R. Baker & Stephanie Johnson & Lorenz Kueng, 2021. "Shopping for Lower Sales Tax Rates," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(3), pages 209-250, July.
    4. Alisdair McKay & Johannes F. Wieland, 2021. "Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy," Econometrica, Econometric Society, vol. 89(6), pages 2717-2749, November.
    5. Francesca Parodi, 2021. "Consumption Tax Cuts in a Recession," Carlo Alberto Notebooks 658, Collegio Carlo Alberto.

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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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