TTPI Seminar
We show how tax kinks can be used to estimate the marginal propensity to consume (MPC). Tax kinks generate discrete changes in the relationship between taxable income and disposable income, which—under a set of testable assumptions—allows for causal identification of the spending response to changes in disposable income. We implement this new approach using Danish administrative data. Applying a regression kink design (RKD), we estimate an MPC of 0.6 (s.e. 0.1) for taxpayers at the top-tax kink. We provide theoretical conditions under which the RKD recovers the contemporaneous MPC and address potential threats from labor-supply responses and tax avoidance around the kink. Our findings have implications for targeting fiscal stimulus and social insurance programs toward high-income households.
Event Speakers
Christian Gillitzer is Senior Lecturer in the School of Economics at the University of Sydney. His research fields are public finance and macroeconomics, and he has done work on topics including state fiscal capacity, optimal commodity taxation, the charitable tax deduction, consumer sentiment and monetary policy transmission.