Do Expenditure Cascades Exist? Evidence from Bush Administration Tax Reforms

Abstract

A series of tax reforms made during the Bush Administration reduced the tax burden of upper-income households more substantially than lower-income households, thereby changing the distribution of after-tax income exogenously. This paper exploits variation in the timing of the reforms and the state share of upper-income households to explore whether there exist consumption externalities trickling down along the income distribution. Using the Consumer Expenditure Survey data ranging from 1994 to 2007, I find robust evidence that upper-income households increased their consumption after the reforms, especially for nondurables. However, I do not find evidence that the degree of potential exposure to upper-income consumption affects lower-income consumption.