Tax News: The Response of Household Spending to Changes in Expected Taxes

51 Pages Posted: 3 Sep 2014 Last revised: 6 May 2023

See all articles by Lorenz Kueng

Lorenz Kueng

Swiss Finance Institute; University of Lugano - Faculty of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2014

Abstract

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.

Suggested Citation

Kueng, Lorenz, Tax News: The Response of Household Spending to Changes in Expected Taxes (August 2014). NBER Working Paper No. w20437, Available at SSRN: https://ssrn.com/abstract=2490845

Lorenz Kueng (Contact Author)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

HOME PAGE: http://www.sfi.ch/en/

University of Lugano - Faculty of Economics

Via Giuseppe Buffi 13
Lugano, TI 6904
Switzerland

HOME PAGE: http://www.usi.ch/en

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://cepr.org/

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