Temporal framing of tax stimuli and household consumption

Abstract

We conduct a large-scale survey experiment with clients of a major German retail bank to examine whether the temporal framing of a tax stimulus as a permanent positive income shock affects consumption behavior. The income shock derives from the abolishment of the German solidarity surcharge on personal income taxes. Participants are randomly assigned to receive information about their additional disposable income in one of three formats: Euros per month (control), Euros per year (yearly treatment), or Euros per ten-year period (10-yearly treatment). We survey participants before the abolishment of the solidarity surcharge and find a statistically and economically significant impact of temporal framing on the intended use of the tax cut. The yearly and 10-yearly treatment groups’ average intended share of the tax cut for spending is 8.0 and 9.4 percentage points lower and for saving is 5.4 and 6.3 percentage points higher compared to the control group. A follow-up survey, six months after the tax rebate came into effect, reveals that participants largely adhered to their intentions, unless the increase in disposable income was diminished by other regulation changes. Those exposed to the yearly and 10-yearly treatments report having spent 7.0 and 8.4 percentage points less and report having saved 7.7 and 8.2 percentage points more relative to the control group. Treatment effects are particularly pronounced for larger tax cuts and among participants with low financial literacy and low cognitive reflection, who are more susceptible to the temporal framing of the rebate.