Consumption And Saving Response To A Tax-Subsidized Saving Policy

Sumit Agarwal, Souphala Chomsisengphet, Pulak Ghosh and Man Zhang
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Souphala Chomsisengphet: Office of the Comptroller of the Currency (US Treasury)

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: To incentivize households to increase private savings, the Indian government implemented in July 2014 a new tax-subsidized saving policy that allowed homeowners to exempt an additional 50,000 INR ($833) of the mortgage principal and interest payments from taxable income. We exploit the exogeneous policy change and assess the extent to which households reduce their consumption in order to finance a tax-favored saving instrument using a unique administrative panel data of consumer debit card and credit card spending transactions. We find that about 31% of households with a mortgage increase the principal repayment amount after the policy change; the median annual increase in principal repayment is about US$307, which is about 36.8% of the higher tax exemption limit. We estimate that households with a mortgage reduce their consumption by US$25 (5.2%) per month on average in order to finance the tax-favored saving account. For a one dollar increase in the income tax exemption limit on long-term savings, private saving increases by $0.23 for the treatment group. Relative to annual income, private savings for the treatment group increase by about 1.87% on average.

Keywords: Tax Preferred Saving Account; Tax Policy; Consumption; Saving; Debit Cards; Household Finance, Banks; Discretionary Spending; Fiscal Policy. (search for similar items in EconPapers)
JEL-codes: D12 D14 D91 E21 E51 E62 G21 H27 (search for similar items in EconPapers)
Pages: 63
Date: 2019-02
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