Consumption Tax Cuts in a Recession

Francesca Parodi
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Francesca Parodi: Cattolica University of Milan, IFS - Institut für Sozialforschung, CEPR - Center for Economic Policy Research

PSE-Ecole d'économie de Paris (Postprint) from HAL

Abstract: I study the effectiveness of temporary cuts to consumption tax rates as fiscal stimulus instruments during recessions using a structural life‐cycle model with multiple consumption categories. I find tax elasticities of 0.4 for nondurable luxuries and of 10.5 for durables. I show that the tax cut on nondurables has an intratemporal substitution effect, whereas the tax cut on durables acts through an intertemporal substitution mechanism that is stronger for high‐income, liquidity‐unconstrained, and younger households. This mechanism is amplified in less persistent recessions and dampened in absence of recessions due to durables' partial irreversibility and precautionary saving motives.

Date: 2024-02
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Published in International Economic Review, 2024, 65 (1), pp.117-148. ⟨10.1111/iere.12661⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:hal-05042062

DOI: 10.1111/iere.12661

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