The Tax Man Cometh: Consumer Spending and Tax Payments
Do high tax payments lower consumer spending? Traditional models view consumer spending as a function of disposable income. Any change in tax payments therefore directly affects disposable personal income, resulting in changes in consumer expenditures. Recent models of consumer behavior, however, argue that people consider their lifetime resources when they make spending decisions. If this were the case, individuals should spread the impact of tax liability changes over their lifetime by adjusting their savings. To see if changes in tax liabilities correspond to contemporaneous changes in consumer spending, the author considers four episodes in which tax payments changed noticeably.