Consumption Response to Permanent Tax Increase: A Ricardian Equivalence Response to Re-distribution
52 Pages Posted: 24 Apr 2020
Date Written: March 31, 2020
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: Suggested Citation