Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model?
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AbstractWe build a life-cycle model with earnings risk, liquidity constraints, and portfolio choice over tax-deferred and taxable assets to evaluate how household consumption changes in response to shocks to transitory anticipated income, such as the 2001 income tax rebate. Households optimally invest in tax-deferred assets, which are encumbered by withdrawal penalties, and exchange taxable precautionary savings for higher after-tax returns. The model predicts a higher marginal propensity to consume out of a rebate than is predicted by a standard frictionless life-cycle model. Liquidity-constrained households—with few financial assets or portfolios expensive to reallocate—consume a higher fraction of the rebates.
CitationHuntley, Jonathan, and Valentina Michelangeli. 2014. "Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model?" American Economic Journal: Macroeconomics, 6 (1): 162-89. DOI: 10.1257/mac.6.1.162
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- E21 Macroeconomics: Consumption; Saving; Wealth
- G11 Portfolio Choice; Investment Decisions
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
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