Consumer response to the 1998 tax cut: Is a temporary tax cut effective?

The Japanese Government implemented two tax cut packages in 1998 to alleviate the weakness of the economy. Those were temporary and the eligible amount for each household was based on the number of family members. Using monthly data from the Family Income and Expenditure Survey, we explore the variation in the impact of the tax cut episode across families with different numbers of family members to identify its impact on consumption. Our estimates indicate that consumers responded to the 1998 tax cut with the implied MPC of 0.6 on impact with stimulating services consumption but the MPC declined in subsequent months.