Taxation and Consumption: Evidence from a Representative Survey of the German Population

Using a representative survey of the German population, this paper studies individual consumption responses to a recent payroll tax reduction. Our results show that 55% of the respondents spend the extra money, indicating considerable potential for tax changes to affect consumption and economic activity. Our analysis of the socio-demographic and economic determinants of consumption responses suggests that temporary and permanent tax changes have a similar impact, that interest rates are an important determinant of consumption responses to tax changes, and that households with higher income have a higher propensity to consume.