Effect of income growth and changes in tax rate on consumption and saving ratios

Abstract

The purpose of this note is to suggest that income growth and changes inthe tax rate affect the observed ratio of savings or consumption to personal disposable income. This is because of the lag in tax payments - which are assessed on last year's income. The difference between taxes paid and liability for tax is included in savings. If consumption and saving decisions by individuals in any year are based on their income in that year less the tax liability payable the following year, actual saving will vary according to changes in income and tax rates. Of course, if individuals ignore.futurejliabilities for tax and base their, decisions solely on current income less current taxes paid, then no bias arises; because of lagged tax payments.