Tax News: The Response of Household Spending to Changes in Expected Taxes / Lorenz Kueng.

Format:

Book

Author/Creator:

Kueng, Lorenz.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20437.

NBER working paper series no. w20437

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Tax News

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

Although theoretical models of household behavior often emphasize fiscal foresight, empirical studies of household consumption have yet to document the role of news about tax changes. Using novel high-frequency bond data, I develop a model of the term structure of municipal yield spreads as a function of future top income tax rates and a risk premium. Testing the model using the presidential elections of 1992 and 2000 as two quasi-natural experiments shows that financial markets forecast future tax rates remarkably well in both the short and long run. Combining these market-based tax expectations with data from the Consumer Expenditure Survey, I find that spending of higher-income households increases by close to 1% in response to news of a 1% increase in expected after-tax lifetime (permanent) income. These findings imply that by ignoring anticipation effects, previous estimates of the total effect of a tax change could be substantially biased.

Notes:

Print version record

August 2014.