Household indebtedness and the macroeconomic effects of tax changes

Sangyup Choi and Junhyeok Shin

Journal of Economic Behavior & Organization, 2023, vol. 209, issue C, 22-52

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)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Household Indebtedness and the Macroeconomic Effects of Tax Changes (2022)
Working Paper: Household Indebtedness and the Macroeconomic Effects of Tax Changes (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:209:y:2023:i:c:p:22-52

DOI: 10.1016/j.jebo.2023.02.022

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