Do Saving Tax Incentives Work? Evidence from Home Equity Accumulation and Consumption Responses

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