Do Saving Tax Incentives Work? Evidence from Home Equity Accumulation and Consumption Responses
66 Pages Posted: 17 Aug 2017 Last revised: 11 Jan 2025
Date Written: January 11, 2025
Abstract
Using high-frequency administrative transaction data, we study the consumption and savings responses to an unexpected increase in tax incentives for voluntary private savings in India. Difference-in-differences estimation shows a significant negative consumption response to the policy. Our estimates imply that 68% of additional voluntary savings through home equity accumulation are funded by reductions in consumption. Overall, the saving tax incentives increase net private savings. We quantify our empirical results with a general equilibrium model with both the housing market and the rental market. Counterfactual simulations suggest that a targeted tax subsidy might have a strong general equilibrium effect and reduce welfare.
Keywords: voluntary savings, home equity, consumption, tax deduction, fiscal policy, general equilibrium, housing market, welfare
JEL Classification: C68, D12, D14, D91, E21, E62, H24, H31, R31
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