Consumption and Savings Response to Permanent Tax Increase

Using a large, representative sample of consumer financial transaction data, this paper studies the consumption and savings response to a permanent increase in income tax. 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 affected consumers experienced little change in their spending but instead adjusted their savings downward. The pattern is prevalent across consumer demographics, and is unexplained by consumer inattentiveness, hyperbolic discounting, or unobserved labor market responses. Furthermore, the tax increase financed fiscal redistribution leads to a rather long-lasting increase in the consumption of the lower-income population