Labour and Public Policy Seminars

Labour & Public Policy Seminar: Rasmus Landersø, Rockwool Fonden

Title: Estimating Marginal Propensities to Consume from Danish Tax Data

Info about event


Friday 19 November 2021,  at 12:15 - 13:15


Fuglesangs Allé 4, 8210 Aarhus V, Building 2632(L), Room 242


How households’ consumption respond to changes in disposable income is important for fiscal policy targeting aggregate demand, income taxation policy, and social policy aimed at welfare inequality.  Using full population administrative data with consumption imputed from income and wealth data, we estimate the marginal propensity to consume (MPC) based on a regression-kink design around tax-bracket thresholds. We estimate the average MPC from variation in tax rates to be 0.5-0.6 for households with at least one taxpayer in the top-tax bracket, but with substantial heterogeneity across household characteristics. We show theoretically how future income and consumption for households with current income around tax-brackets can be used to infer the MPC out of permanent income. Our results are informative for a range of different policy decisions while our approach provide researchers and policymakers with an easy-to-implement identification of a key policy parameter.