Abstract
When the zero lower bound on nominal interest rate binds, monetary policy makers may lack traditional tools to stimulate aggregate demand. We investigate whether “unconventional” fiscal policy, in the form of preannounced consumption tax changes, has the potential to meaningfully shift durables purchases intertemporally and how it is affected by consumer credit. In particular, we test whether car sales react in anticipation of future sales tax changes, leveraging 57 preannounced changes in state sales tax rates from 1999 to 2017. We find evidence for substantial tax elasticities, with car sales rising by more than 8% in the month before a 1% increase in the sales tax rate. Responses are heterogeneous across households and sensitive to supply of credit. Consumers with high credit risk scores are most able to pull purchases forward. At the same time, other effects such as customer composition and attention lead to even greater tax elasticity during recessions, despite these credit frictions. We discuss policy implications and the likely magnitudes of tax changes necessary for any substantive long-term responses.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1-32 |
| Number of pages | 32 |
| Journal | Tax Policy and the Economy |
| Volume | 33 |
| Issue number | 1 |
| DOIs | |
| State | Published - 2019 |
Funding
We would like to thank Robert Moffitt for comments on earlier drafts and participants at the Workshop on New Consumption Data in Copenhagen and the NBER Tax Policy and the Economy Conference for valuable feedback. Jacqueline Craig provided excellent research assistance. This paper represents the views of the authors and does not necessarily reflect the opinions of the Federal Reserve Bank of Chicago or the Federal Reserve System. For acknowledgments, sources of research support, and disclosure of the au-thors’ material financial relationships, if any, please see https://www.nber.org/chapters /c14184.ack.
ASJC Scopus subject areas
- Finance
- Economics and Econometrics
