Consumption Responses and Redistributive Implications of Luxury Durable Tax Rebates

This paper evaluates the impact of tax rebates on luxury durables, using Thailand's 2011 car tax rebate as a case study. Utilizing 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. The estimated Elasticity of Intertemporal Substitution (EIS) for Thailand is 0.2, with higher EIS observed among wealthier and older households.