Tax Policy and Consumer Spending: Evidence from Japanese Fiscal Experiments

This paper studies the extent to which the impact on consumer spending differs between temporary and permanent, as well as anticipated and unanticipated tax changes. To discriminate between them, we use institutional 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 that of permanent ones. We also find that more than 80 percent of Japanese consumers, including those who distinguish between temporary and permanent tax changes, respond to tax changes not at the timing of policy announcement but at the timing of implementation. We suggest an interpretation that some of them follow a near-rational decision rule.