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Household debt and the dynamic effects of income tax changes

Author

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  • Cloyne, James

    (Bank of England)

  • Surico, Paolo

    (London Business School)

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 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.

Suggested Citation

  • Cloyne, James & Surico, Paolo, 2014. "Household debt and the dynamic effects of income tax changes," Bank of England working papers 491, Bank of England.
    • Handle: RePEc:boe:boeewp:0491
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    More about this item

    Keywords

    mortgage debt; narrative tax changes; liquidity constraints;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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