Household Indebtedness and the Macroeconomic Effects of Tax Changes

Sangyup Choi and Junhyeok Shin

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This study investigates whether household indebtedness influences the macroeconomic effects of U.S. tax changes. By applying a state-dependent local projection method to the exogenous tax shock series, we find that a tax cut is more effective in stimulating output when the economy is characterized by higher household indebtedness. The household debt-dependent tax policy is primarily driven by (i) the response of private consumption, not private investment; (ii) changes in personal income tax, not corporate income tax, suggesting the relevance of a higher MPC of constrained households in understanding the documented state dependence. In response to a tax cut, labor supply also increases more during a high-debt state, which is consistent with the micro-level evidence on the labor supply of constrained households, thereby contributing to higher tax multipliers. Our findings are robust to a battery of sensitivity checks, especially controlling for the additional states of the economy considered in the literature.

Keywords: Tax policy; Household debt; Borrowing constraints; Marginal propensity to consume; Nonlinearity; Local projections (search for similar items in EconPapers)
JEL-codes: E32 E62 G51 H30 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2022-09
New Economics Papers: this item is included in nep-pbe and nep-pub
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https://cama.crawford.anu.edu.au/sites/default/fil ... 6_2022_choi_shin.pdf (application/pdf)

Related works:
Journal Article: Household indebtedness and the macroeconomic effects of tax changes (2023)
Working Paper: Household Indebtedness and the Macroeconomic Effects of Tax Changes (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2022-56

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