Saving Tax Incentives and Consumption: Evidence from a Policy Experiment

Abstract

Using high-frequency administrative transaction data, we study the consumption response to a fiscal policy in India that resulted in an increase in tax incentives for voluntary private savings. Difference-in-differences estimation shows a significant negative consumption response to the policy. 66% of additional voluntary savings through home equity accumulation are funded by a reduction in consumption. Heterogeneity analyses reveal that the amount of claimable tax benefits and liquidity buffers are significant drivers of the negative spending response. These results imply that saving tax incentives increase net private savings.

Keywords: Tax Policy, Consumption, Saving, Debit Cards, Household Finance, Banks, Discretionary Spending, Fiscal Policy

JEL Classification: D12, D14, D91, E21, E51, E62, G21, H27, H31