Fiscal Policy and Consumer Behavior

The interrelationship between consumption and fiscal policy has not been clearly defined. Various theories have been proposed to explain reactions to such events as the 1968 tax surcharge, all of which could possibly be true. However, there is no proof from which to draw a conclusion on any one theo...

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Bibliographic Details
Published in:The review of economics and statistics 1979-05, Vol.61 (2), p.317-321
Main Author: Tanner, J. Ernest
Format: Article
Language:English
Subjects:
Analysis
Coefficients
Consumer attitudes
Consumer behavior
Consumer spending
Consumption
Deficit financing
Fiscal policy
Government
Income taxes
Marginal propensity to consume
Public debt
Studies
Surplus
Tax liabilities
Wealth
World wars
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Summary:The interrelationship between consumption and fiscal policy has not been clearly defined. Various theories have been proposed to explain reactions to such events as the 1968 tax surcharge, all of which could possibly be true. However, there is no proof from which to draw a conclusion on any one theory. The life cycle approach was used in an analysis to determine the effects of government deficits on consumer behavior. With this approach a consumption function is defined in terms of disposable income, the unemployment rate, retained earnings of corporations, the stock of consumer durables, private sector wealth, and government surplus. Application of this approach to data over the period 1929-1974 shows that when government deficits occur, most consumers perceive possible increased taxes in the future. Because of this assumption, these deficits have little effect on increasing consumption.
ISSN:0034-6535
1530-9142
DOI:10.2307/1924604