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

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  • Lorenz Kueng

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

  • Lorenz Kueng, 2014. "Tax News: The Response of Household Spending to Changes in Expected Taxes," NBER Working Papers 20437, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20437
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    Cited by:

    1. Rabah Arezki & Valerie A. Ramey & Liugang Sheng, 2017. "News Shocks in Open Economies: Evidence from Giant Oil Discoveries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(1), pages 103-155.
    2. Daniel Garrett & Andrey Ordin & James W Roberts & Juan Carlos Suárez Serrato, 2023. "Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(2), pages 815-851.
    3. Miura, Ken & Sakurai, Takeshi, 2021. "News from the Sky: An Empirical Test of Forward-Looking Behavior Among Zambian Farmers," 2021 Conference, August 17-31, 2021, Virtual 315161, International Association of Agricultural Economists.
    4. Mathieu Pedemonte, 2020. "Fireside Chats: Communication and Consumers’ Expectations in the Great Depression," Working Papers 20-30, Federal Reserve Bank of Cleveland.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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