Household Debt and the Dynamic Effects of Income Tax Changes

Cloyne, J S and Surico, P (2017) Household Debt and the Dynamic Effects of Income Tax Changes. Review of Economic Studies, 84 (1). pp. 45-81. ISSN 0034-6527

Abstract

Using a new narrative measure of fiscal policy shocks for the U.K., we show that households with mortgage debt exhibit large and significant consumption responses to tax changes. Homeowners without a mortgage, in contrast, do not adjust their expenditure, with responses not statistically different from zero at all horizons. We compare our findings to the predictions of traditional and newer theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the macroeconomy.