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Research Paper Bank of England Working Paper Series 491

Household debt and the dynamic effects of income tax changes

Authors

Publication date

Mar 2014

Summary

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.

ISSN

16

Subjects

Households, Debt: Indebtedness, and Taxation

Links

http://www.bankofengland.co.uk/research/Pages/workingpapers/2014/wp491.aspx

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