Abstract:
This paper studies the stimulating effect of personal income tax reform in 2011 on household consumption. Based on the dataset of China Family Panel Studies (CFPS), we find significant discrepancies of stimulating effect between tax on wage and tax on self-employed operating income. Specifically, for tax on wage every 100 Yuan tax cut boosts 138 Yuan of household consumption on average, but for tax on self-employed operating income the stimulating effect is both small and insignificant. Since spending patterns, financial constraints, precautionary savings and myopia exist, the effect of stimulation on different types of household indicates apparent heterogeneity. Our results show that heavy tax burden directly suppresses household consumption, and reducing personal income tax and increasing the share of household income is an efficacious method to stimulate consumption.
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