Consumption Response to Permanent Tax Increase: A Ricardian Equivalence Response to Re-distribution

52 Pages Posted: 24 Apr 2020

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Wenlan Qian

National University of Singapore - NUS Business School

Bernard Yin Yeung

National University of Singapore - Business School

Huanhuan Zheng

National University of Singapore

Date Written: March 31, 2020

Abstract

Raising income tax marginally to enhance government spending power may not affect the consumption trends of the taxed if they internalize government net worth. This is a generalized Ricardian Equivalence based on trustworthy rule-based fiscal discipline. Under Singapore’s Constitution, each administration must not have a cumulative budget deficit and must transfer any accumulated surpluses at the end of its term to national reserves constrained to support budget spending and Singapore’s currency. In 2015, Singapore marginally raised the income taxes on high-income taxpayers. Using difference-in-differences regressions, controlling for individual fixed effects and year-month fixed effects, we show robust results that the tax increases dampen only the affected non-Singaporeans’ consumption patterns but not Singaporeans’. Furthermore, the tax increase financed fiscal redistribution leads to a rather long-lasting increase in the recipients’ consumption trends. Generalized Ricardian Equivalence gives a government the marginal freedom to tap on the private sector’s resources to finance redistribution and other spending programs with positive externalities.

Keywords: Income Tax, Consumption, Richardian Equivalence, Redistributive Policy, Fiscal Policy

JEL Classification: H24, E21, H31, H53, H61, H62, H63

Suggested Citation

Agarwal, Sumit and Qian, Wenlan and Yeung, Bernard Yin and Zheng, Huanhuan, Consumption Response to Permanent Tax Increase: A Ricardian Equivalence Response to Re-distribution (March 31, 2020). Available at SSRN: https://ssrn.com/abstract=3564834 or http://dx.doi.org/10.2139/ssrn.3564834

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Wenlan Qian (Contact Author)

National University of Singapore - NUS Business School ( email )

15 Kent Ridge Drive
Singapore 117592, 119245
Singapore
(65) 65163015 (Phone)

HOME PAGE: http://sites.google.com/site/wenlanqian/

Bernard Yin Yeung

National University of Singapore - Business School ( email )

15 Kent Ridge Drive
BIZ 1 Level 6
Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

Huanhuan Zheng

National University of Singapore ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

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