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.