Finance and Economics Discussion Series (FEDS)
July 2015 (Revised January 2016)
Consumer Spending and Fiscal Consolidation: Evidence from a Housing Tax Experiment
Paolo Surico and Riccardo Trezzi
Abstract:
A sudden change of government in Italy at the end of 2011 prompted the legislation of a large fiscal consolidation plan. A major intervention of this plan was a temporary change (referred in the law as 'experiment') to the property tax system, generating significant variation in the amount of housing taxes paid across home-owners. Using new questions appositely added to the Survey on Household Income and Wealth (SHIW), we exploit this cross-sectional variation to provide an unprecedented analysis of the effects of a fiscal consolidation policy on consumer spending. A tax hike on the main dwelling leads to large expenditure cuts among mortgagors with low liquid wealth but generates only small revenues for the government. In contrast, higher tax rates on other residential properties reduce private savings and yield large tax revenues.
Revised Paper DOI: http://dx.doi.org/10.17016/FEDS.2015.057r1
Revised Paper: Accessible materials (.zip)
Original Paper: Full paper (PDF)
Original Paper DOI: http://dx.doi.org/10.17016/FEDS.2015.057
Keywords: Fiscal consolidation, housing taxes, marginal propensity to consume, mortgage debt, tax hike
DOI: http://dx.doi.org/10.17016/FEDS.2015.057r1
PDF: Full Paper