Tax policy and consumer spending: evidence from Japanese fiscal experiments

This paper studies the extent to which the impact of tax policy on consumer spending differs between temporary and permanent, as well as anticipated a nd unanticipated tax changes. To discriminate between them, we use institut ional information such as legal distinction between temporary and permanent tax changes, as well as timing of policy announcement and implementation. We find that the impact of temporary changes is significantly smaller than the impact of permanent changes. We also find that more than 80 percent of Japanese consumers, including those who distinguish between temporary and p ermanent tax changes, respond to tax changes at the time of their implement ation and not at the time of a policy announcement. We suggest an interpret ation that these consumers follow a near-rational decision rule. (C) 2001 E lsevier Science B.V. All rights reserved.