Taxing the Rich to Finance Redistribution: Evidence from a Permanent Tax Increase in Singapore

Abstract

Based on a representative sample of consumer financial transaction data, this paper studies the consumption and savings response to a 2015 permanent increase in the marginal income tax of the high-income taxpayers. Using difference-in-differences regressions, controlling for individual and time fixed effects, we show robust results that the affected consumers experienced little change in their spending. The pattern is prevalent across consumer demographics and is found even among consumers who are sophisticated, have high levels of debt, or register little income changes. Furthermore, the tax increase financed fiscal redistribution leads to a long-lasting increase in the consumption of the lower-income population. This paper was accepted by Lukas Schmid, finance. Funding: The authors gratefully acknowledge financial support from Social Science Research Thematic Grant in Singapore [Future-Proofing Singapore: An Economic Approach MOE2019-SSRTG-024]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4823 .