A Model of Anticipated Consumption Tax Changes

Abstract

This paper studies household spending responses to anticipated changes in the consumption tax. To do so, I construct a life-cycle heterogeneous-agent general equilibrium model with durables. The model features a wedge in durable transactions that reflects the actual consumption tax system: households pay the tax when buying the durables but do not receive the tax when selling them. There are three main findings. First, the baseline model reproduces an empirically consistent dynamic pattern of tax elasticity of the taxable spendings. Second, I find that life-cycle is a key component to match the level of tax elasticity of durable spending. Third, the baseline model generates smaller stockpiling of durables based on realistic motive than a model without the wedge. I then use the model for two counter-factual experiments.The first counter-factual experiment finds that the effect of a consumption tax cut is not symmetric to the tax hike. The second counter-factual experiment which compares a one-time tax hike and a multiple-times tax hike shows the multiple-times tax hike scheme generates smaller welfare cost than one-time tax hike.