Consumption responses and redistributive implications of luxury durable tax rebates

Abstract

This paper evaluates the impact of tax rebates on luxury durables, using Thailand's 2011 car tax rebate as a case study. Utilising a stochastic dynamic model with heterogeneous agents, where cars serve as both luxury goods and illiquid assets, the study finds that the policy effectively boosted consumption by targeting households with a high propensity to spend. However, it was regressive, primarily benefiting high-income households and leading to prolonged negative effects on household spending and saving. Additionally, the policy caused second-hand car prices to drop. This enabled lower-income households to purchase used cars at lower costs, but further prolonged and deepened cuts in non-durable spending and savings. Using the estimated parameters and the shocks to the interest rate in the policy experiment, the simulated short-run elasticity of intertemporal substitution for Thailand is low – typically between 0 and 0.1. Wealthier and older households increase spending in response to the rate increase, whereas poorer and younger households tend to boost saving instead.