Investigating the impact of aggregate household wealth changes permanent versus transitory wealth effects on consumption and taxable income /

by 1970- Tuttle, Markland Howard

This dissertation examines the permanent and transitory effects of aggregate wealth changes on aggregate consumption and the distribution of taxable income, while controlling for other important macroeconomic factors. In the three essays presented, the first investigates the relationship between consumption, wealth, and disposable income. In addition, the relationship between the disaggregated components of consumption (nondurable, durable, and services consumption), wealth, and disposable income is explored. Through the use of cointegration techniques and Vector Error-Correction Models, the permanent and transitory responses of all series are investigated. The findings suggest that aggregate consumption, wealth, and disposable income are endogenous in the long run. Therefore, all three series permanently adjust to changes in any one of these series. Once consumption is disaggregated, non-durable consumption and durable consumption are endogenous. Structural breaks are found in the long run relationships, but results are robust with the inclusion of these breaks. The second essay disaggregates wealth into assets and liabilities. The permanent and transitory impacts of asset and liabilities changes on consumption are examined. Results demonstrate that disaggregating wealth has no impact on the long run endogeneity of aggregate consumption. Further, assets are endogenous, responding to changes in consumption, disposable income, and assets in the long run. The final essay examines the role of wealth in determining the distribution of taxable income. In particular, changes in the share of Adjusted Gross Income reported by the top 0.5 percent of households (AGI Share) are investigated. Wealth is a significant contributor to permanent changes in the AGI share, with increases in wealth having a iv positive effect on the share of income held by households in the top 0.5 percent of the AGI distribution. Further, the capital gains tax and the top marginal income tax rate have a permanent negative effect on the AGI share. Further, ninety-five the ninety-seven percent of these permanent changes occur within two years. In addition, wealth and the capital gains tax rate create transitory changes in the AGI share. v