Tax incentives and household consumption: Evidence from the personal income tax reform

Xinyu Zhan, Lanxin Liang and Mingzhe Yu

Finance Research Letters, 2025, vol. 77, issue C

Abstract: This study focuses on the impact of tax incentives on household consumption in the context of personal income tax reform. Our results show that the 2018 personal income tax reform increases household consumption, and the primary mechanism through which the reform promotes consumption operates through increased disposable income, with its magnitude being influenced by liquidity constraint theory and precautionary savings theory. The implementation of special additional deductions in 2018 personal income tax increases household consumption, however, not all deduction items can promote consumption. In different income levels and income types, there is a different effect in this reform.

Keywords: Personal income tax reform; Household consumption; Special additional deductions (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:77:y:2025:i:c:s1544612325004052

DOI: 10.1016/j.frl.2025.107142

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