We estimate the consumption responses of Italian households to the income tax credit introduced in 2014, using the
panel component of the Survey of Household Income and Wealth. We find that households that received the bonus increased their food and durable consumption by about 20 and 30 euros, respectively; these results are consistent with an aggregate marginal propensity to consume (MPC) out of the bonus in the range of 0.5-0.6. Responses are larger for households with low liquid wealth or low income. Our estimates are quite robust to different model's specifications and
broadly in line with the evidence available from similar tax rebates in other countries but, due to the small sample size, are not statistically significant. To further support our results we have then simulated an overlapping generation model that can quantify households' consumption responses to the Italian tax credit: the MPC out of the model are in line with our empirical estimates. We show that low-income households, especially when young, compress their non-housing consumption and use most of their liquid saving to achieve their desired level of housing. We find that, given the lumpiness in house sizes, the tax credit is too small to allow for an increase in housing consumption. At the same time, households have few incentives to increase their liquid saving since the housing good already guarantees an important storage of wealth. As a result, households use the rebate to rebalance their consumption basket towards the composite non-housing good.