Silviase/jgov_v1.4_full_ann huggingface dataset:
(4) Cumulative specification (normalized by consumption in the first month)

First	Second	Third	Fourth	Fifth
a) 1998 Tax Cut (The February Tax Cut)
January-June Panel

Specification (8-1)
Feb.	Feb.-Mar.	Feb.-Apr.	Feb.-May	Feb.-Jul.
Total Consumption (N=4,274)	0.43 (0.35)	0.46 (0.20)	0.26 (0.17)	0.34 (0.15)	0.15 (0.09)
s.e.e.	0.33	0.28	0.26	0.25	0.25
R squared (adj)	0.05	0.16	0.21	0.24	0.26
Semi-durables (N=4,121)	-0.35 (1.19)	-0.09 (0.76)	-0.38 (0.67)	0.30 (0.63)	-0.03 (0.37)
s.e.e.	1.28	1.09	1.02	0.98	0.96
R squared (adj)	0.01	0.04	0.06	0.06	0.06
Non-durables (N=4,295)	0.15 (0.21)	0.15 (0.13)	0.06 (0.12)	0.06 (0.11)	0.02 (0.07)
s.e.e.	0.24	0.20	0.20	0.20	0.20
R squared (adj)	0.03	0.07	0.09	0.10	0.11
Services (N=4,267)	1.34 (0.67)	0.86 (0.38)	0.61 (0.32)	0.63 (0.29)	0.34 (0.18)
s.e.e.	0.63	0.53	0.50	0.49	0.47
R squared (adj)	0.02	0.09	0.12	0.13	0.15

Specification (8-1) without adjusting income other than tax cut
Feb.	Feb.-Mar.	Feb.-Apr.	Feb.-May	Feb.-Jul.
Total Consumption (N=4,274)	1.25 (0.35)	1.26 (0.21)	1.12 (0.18)	1.14 (0.17)	0.75 (0.10)
s.e.e.	0.34	0.30	0.29	0.29	0.28
R squared (adj)	0.01	0.02	0.03	0.03	0.03
Semi-durables (N=4,121)	0.64 (1.19)	1.19 (0.77)	1.15 (0.68)	1.77 (0.64)	1.03 (0.38)
s.e.e.	1.29	1.11	1.05	1.01	0.99
R squared (adj)	0.00	0.01	0.01	0.00	0.00
Non-durables (N=4,295)	0.39 (0.21)	0.44 (0.13)	0.36 (0.12)	0.36 (0.11)	0.25 (0.07)
s.e.e.	0.24	0.21	0.20	0.20	0.20
R squared (adj)	0.02	0.04	0.04	0.05	0.05
Services (N=4,267)	2.25 (0.66)	1.95 (0.39)	1.78 (0.33)	1.73 (0.30)	1.16 (0.19)
s.e.e.	0.63	0.56	0.53	0.52	0.51
R squared (adj)	0.00	0.00	0.01	0.01	0.01
b) Shopping Coupon Program (1999)
January-June Panel (Specification (8-2))
Mar.	Mar.-Apr.	Mar.-May	Mar.-Jun.	Mar.-Jul.
Total Consumption: (N=5,240)	0.86 (0.20)	0.48 (0.19)	0.25 (0.17)	0.04 (0.17)
s.e.e.	0.44	0.43	0.37	0.38
R squared (adj)	0.01	0.01	0.00	0.01
Semi-durables: (N=5,206)	0.23 (0.07)	0.07 (0.07)	-0.02 (0.06)	-0.01 (0.06)
s.e.e.	0.16	0.15	0.13	0.13
R squared (adj)	0.02	0.01	0.00	0.00
Non-durables: (N=5,272)	0.01 (0.05)	-0.04 (0.05)	-0.01 (0.05)	-0.08 (0.05)
s.e.e.	0.12	0.11	0.12	0.11
R squared (adj)	0.01	0.01	0.01	0.01
Services: (N=5,249)	0.51 (0.14)	0.36 (0.16)	0.17 (0.13)	0.10 (0.13)
s.e.e.	0.32	0.35	0.28	0.29
R squared (adj)	0.00	0.01	0.00	0.00
February-July Panel(Specification (8-2))
Total Consumption: (N=5,247)	0.53 (0.18)	0.59 (0.17)	0.49 (0.15)	0.47 (0.15)	0.34 (0.17)
s.e.e.	0.44	0.42	0.36	0.38	0.43
R squared (adj)	0.01	0.01	0.01	0.01	0.01
Semi-durables: (N=5,248)	0.09 (0.07)	0.09 (0.06)	0.15 (0.05)	0.08 (0.05)	0.03 (0.06)
s.e.e.	0.16	0.14	0.13	0.13	0.15
R squared (adj)	0.01	0.01	0.01	0.00	0.00
Non-durables: (N=5,304)	0.03 (0.05)	0.07 (0.05)	0.02 (0.05)	0.01 (0.05)	0.03 (0.06)
s.e.e.	0.12	0.11	0.12	0.12	0.13
R squared (adj)	0.01	0.01	0.01	0.01	0.02
Services: (N=5,231)	0.30 (0.13)	0.25 (0.13)	0.35 (0.11)	0.33 (0.11)	0.28 (0.12)
s.e.e.	0.32	0.33	0.27	0.28	0.31
R squared (adj)	0.00	0.00	0.01	0.00	0.00

Notes: Standard errors in parenthesis. Data are panels from 1990 to 1999. The dependent variable is the log of the ratio of the sum of consumption after March to consumption in January (tax cut) or February (coupon program). The estimated elasticity in the tax cut is the coefficient on tax cuts (see the text) relative to consumption in January and that in the shopping coupons is the coefficient on coupons (computed as number of children x 20,000 yen) relative to consumption in February. All regressions also include a quadratic in the age of the household head, the number of family members (the number of children under 15 and others respectively for the shopping coupons), and indicator variables for year. A household is eliminated if the number of family members is changed. Total consumption excludes durables.
Table Appendix 1 : Impact of Announcement on Seasonal Consumption Patterns

Sep.-Feb.	Oct.-Mar.	Nov.-Apr.	Nov.-Apr.
$ Taxcut_{h,t} $	Eligible amount	Eligible amount	Eligible amount	Actual amount
Semi-durables	0.36	-0.08	0.28	2.69
(0.30)	(0.34)	(0.42)	1.79
N.of obs.	5,141	4,886	4,913	4,913
Non-durables	-0.13	-0.08	-0.09	-0.03
(0.06)	(0.06)	(0.08)	(0.36)
N.of obs.	5,175	4,911	5,000	5,000
Services	0.15	-0.07	-0.58	0.30
(0.19)	(0.19)	(0.21)	(0.94)
N.of obs.	5,129	4,878	4,956	4,956

Notes: Standard errors in parenthesis. The sample comes from 1990 and 1998. The specification is

$$ \ln\left(\frac{C_{h,t(afterDecember)}}{C_{h,t(BeforeDecember)}}\right)=a_{1}\cdot\left(\frac{Taxcut_{h,t}}{Monthly Income_{h}}\right)+Z_{h,t}^{^{\prime}}\cdot a_{2}+Year_{t}^{^{\prime}}\cdot a_{3} $$

where the dependent variable is the log of the ratio of the sum of consumption after December to the average monthly consumption before December, and the main independent variable is the value of tax cuts relative to monthly pre-tax income in the previous year. “Eligible amount” refers the upper limit for each household and “actual amount” does to the sum of tax cut amount a household received during February and April.
Table Appendix 2: Elasticity from Shopping Coupons: Cross-Sectional Estimates (1999). Month-to-month specification normalized by the pretax income in the previous year.

C_{mar} - C_{feb}	C_{apr} - C_{feb}	C_{may} - C_{feb}	C_{jun} - C_{feb}	C_{jul} - C_{feb}
January-June Panel
Total	0.32	0.09	-0.49	-0.63
Consumption:	(0.37)	(0.37)	(0.36)	(0.39)
(N=482)
s.e.e.	0.35	0.34	0.33	0.36
R squared (adj)	0.01	-0.00	-0.00	0.01
Semi-durables:	4.50	3.06	-1.63	-1.28
(N=460)	(1.52)	(1.40)	(1.41)	(1.41)
s.e.e.	1.37	1.27	1.28	1.27
R squared (adj)	0.02	0.01	-0.00	0.00
Non-durables:	-0.17	-0.33	-0.39	-0.68
(N=490)	(0.24)	(0.24)	(0.25)	(0.25)
s.e.e.	0.22	0.22	0.23	0.23
R squared (adj)	-0.00	0.01	0.01	0.01
Services:	-0.77	-0.46	-0.29	-0.74
(N=477)	(0.68)	(0.65)	(0.62)	(0.70)
s.e.e.	0.64	0.61	0.58	0.66
R squared (adj)	0.01	0.00	-0.01	-0.00
February-July Panel
Total	0.13	0.34	0.35	0.11	-0.45
Consumption:	(0.36)	(0.38)	(0.35)	(0.37)	(0.39)
(N=499)
s.e.e.	0.34	0.36	0.33	0.35	0.37
R squared (adj)	-0.00	0.00	-0.00	0.00	0.01
Semi-durables:	3.23	3.54	2.59	-0.67	-1.21
(N=450)	(1.52)	(1.50)	(1.44)	(1.47)	(1.50)
s.e.e.	1.33	1.31	1.25	1.28	1.31
R squared (adj)	0.02	0.01	0.01	-0.00	-0.00
Non-durables:	0.37	0.50	0.18	0.21	0.29
(N=502)	(0.23)	(0.23)	(0.25)	(0.26)	(0.29)
s.e.e.	0.22	0.21	0.23	0.24	0.27
R squared (adj)	0.00	0.01	0.01	0.01	0.02
Services:	-0.92	-0.58	0.65	0.55	-0.35
(N=490)	(0.70)	(0.70)	(0.63)	(0.63)	(0.71)
s.e.e.	0.66	0.66	0.59	0.59	0.67
R squared (adj)	0.01	0.01	-0.00	-0.01	0.01

Notes: Sample are panels from January-June 1999 and February-July 1999. Standard errors in parenthesis. The dependent variable is the log of consumption in each month relative to consumption in February and the estimated elasticity is the coefficient on the amount of the shopping coupon (computed as the number of children x 20,000 yen) relative to monthly income in the previous year. All regressions also include a quadratic in the age of the household head. Total consumption excludes durables.
Table Appendix 3: Elasticity from Shopping Coupons: Cross-Sectional Estimates (1999). Cumulative specification normalized by the pretax income in the previous year

C_{mar}-C_{feb}	C_{apr}-C_{feb}	C_{may}-C_{feb}	C_{jun}-C_{feb}	C_{jul}-C_{feb}
January-June Panel
Total	0.26	0.11	-0.17	-0.32
Consumption:	(0.37)	(0.33)	(0.31)	(0.30)
(N=491)
s.e.e.	0.34	0.31	0.29	0.28
R squared (adj)	0.01	0.01	0.00	0.00
Semi-durables:	4.35	3.34	1.92	1.17
(N=478)	(1.52)	(1.27)	(1.21)	(1.19)
s.e.e.	1.39	1.16	1.10	1.09
R squared (adj)	0.02	0.01	-0.00	-0.00
Non-durables:	-0.11	-0.22	-0.25	-0.34
(N=497)	(0.24)	(0.20)	(0.20)	(0.19)
s.e.e.	0.22	0.19	0.18	0.18
R squared (adj)	-0.00	0.00	0.01	0.01
Services:	-0.51	-0.44	-0.52	-0.55
(N=493)	(0.71)	(0.62)	(0.56)	(0.55)
s.e.e.	0.66	0.58	0.53	0.51
R squared (adj)	0.00	0.00	0.00	0.00
February-July Panel
Total	0.10	0.09	0.17	0.11	-0.03
Consumption:	(0.36)	(0.33)	(0.30)	(0.29)	(0.29)
(N=509)
s.e.e.	0.34	0.31	0.28	0.28	0.28
R squared (adj)	-0.00	0.00	-0.00	0.00	0.01
Semi-durables:	3.92	3.94	3.52	2.66	1.70
(N=480)	(1.47)	(1.29)	(1.21)	(1.18)	(1.17)
s.e.e.	1.34	1.18	1.10	1.08	1.07
R squared (adj)	0.02	0.02	0.02	0.01	0.01
Non-durables:	0.31	0.40	0.28	0.23	0.21
(N=510)	(0.23)	(0.19)	(0.19)	(0.19)	(0.19)
s.e.e.	0.21	0.18	0.18	0.18	0.18
R squared (adj)	0.00	0.01	0.00	0.01	0.01
Services:	-0.96	-1.13	-0.74	-0.57	-0.63
(N=507)	(0.70)	(0.62)	(0.57)	(0.55)	(0.56)
s.e.e.	0.67	0.59	0.54	0.53	0.53
R squared (adj)	0.01	0.01	0.01	0.00	0.01

Notes: Sample are panels from January-June 1999 and February-July 1999. Standard errors in parenthesis. The dependent variable is log of cumulative consumption up to each month relative to consumption in February and the estimated MPC is the coefficient on the amount of the shopping coupon (computed as the number of children x 20,000 yen). All regressions also include a quadratic in the age of the household head. Total consumption excludes durables.
Table Appendix 4: Consumption Effects of Announcement of Shopping Coupon Program

C_{nov} - C_{oct}	C_{dec} - C_{oct}	C_{jan} - C_{oct}	C_{feb} - C_{oct}
July-December Panel
Total Consumption:	-0.08	-0.52
(N=5,066)	(0.35)	(0.37)
s.e.e.	0.34	0.36
R squared (adj)	0.00	0.02
Semi-durables:	0.11	0.02
(N=4,874)	(1.30)	(1.26)
s.e.e.	1.20	1.16
R squared (adj)	0.00	0.01
Non-durables:	-0.10	-0.48
(N=5,110)	(0.24)	(0.27)
s.e.e.	0.23	0.26
R squared (adj)	0.00	0.07
Services:	-0.21	-0.39
(N=5,060)	(0.66)	(0.69)
s.e.e.	0.64	0.66
R squared (adj)	0.00	0.00
August-January Panel
Total Consumption:	0.20	-0.08	0.09
(N=5,017)	(0.31)	(0.34)	(0.33)
s.e.e.	0.32	0.36	0.35
R squared (adj)	0.00	0.01	0.01
Semi-durables:	-0.05	-1.35	-0.58
(N=4,750)	(1.15)	(1.15)	(1.25)
s.e.e.	1.17	1.17	1.28
R squared (adj)	-0.00	0.00	0.00
Non-durables:	0.01	-0.05	-0.20
(N=5,058)	(0.22)	(0.25)	(0.24)
s.e.e.	0.23	0.26	0.25
R squared (adj)	0.00	0.06	0.01
Services:	0.31	-0.29	-0.21
(N=4,982)	(0.58)	(0.62)	(0.60)
s.e.e.	0.60	0.65	0.63
R squared (adj)	0.00	0.00	0.00
September-February Panel
Total Consumption:	-0.23	-0.45	-0.15	-0.13
(N=5,021)	(0.30)	(0.31)	(0.31)	(0.30)
s.e.e.	0.34	0.35	0.36	0.35
R squared (adj)	0.00	0.02	0.01	0.01
Semi-durables:	-0.62	-0.78	0.68	-2.04
(N=4,686)	(1.05)	(1.01)	(1.10)	(1.16)
s.e.e.	1.18	1.13	1.23	1.29
R squared (adj)	0.00	0.00	0.00	0.00
Non-durables:	0.06	-0.14	-0.17	-0.09
(N=5,096)	(0.20)	(0.22)	(0.22)	(0.20)
s.e.e.	0.23	0.26	0.25	0.24
R squared (adj)	0.00	0.06	0.02	0.00
Services:	-0.39	-0.37	-0.32	0.26
(N=4,996)	(0.54)	(0.56)	(0.55)	(0.55)
s.e.e.	0.62	0.65	0.64	0.64
R squared (adj)	0.00	0.00	0.00	0.01

Note: The sample are panels from July-December, August-January, and September-February from 1990 to 1999. Standard errors in parenthesis. The dependent variable is the log of consumption in each month relative to consumption in February. The estimates presented in the table are the coefficient on the anticipated amount of the shopping coupon (computed as the number of children x 20,000 yen) relative to monthly income in the previous year for the 1998 and 1998-1999 panels (and zero for the other panels). All regressions also include a quadratic in the age of the household head, the number of children under the age of 15, the number of other family members, and indicator variables for year. Total consumption excludes durables.
Table Appendix 5: Impact of Coupons by Asset Levels

A/Y	A/Y	A/Y	A/Y	A/Y	A/Y
> mean	< mean.	> 1	< 1	> 1/2	< 1/2
Semi-durables	-4.17	6.09	1.35	6.11	1.57	8.77
(3.26)	(1.91)	(2.25)	(2.38)	(1.96)	(2.95)
N of Obs.	1,116	2,153	1,673	1,596	2,608	661
s.e.e.	1.32	1.36	1.35	1.35	1.36	1.32
R squared (adj)	0.03	0.01	0.02	0.01	0.01	0.02

Note: Regressions are difference in difference estimates on matched panels of the FIES and FSS from 1990 to 1999. The dependent variable is the log of the ratio of consumption of semi-durables in March to consumption in February. A/Y is the ratio of gross assets to annual pre-tax income.
# Consumer Response to the 1994 Tax Cut: Evaluating the First Tax Cut in the 1990s

## Abstract:

This paper explores the reaction of Japanese consumers to the 1994 tax cut, which was the first tax cut administered by the Japanese government in the 1990s. Micro-level data from the Family Income and Expenditure Survey (FIES) is used to evaluate the effect of the 1994 tax cut on consumption. The estimates weakly suggest that tax cuts undertaken to stimulate the weak economy in 1994 had some effect on consumption of non-durables or semi-durables. An MPC of 0.1 – 0.2 is estimated right after implementation, but the positive effect was substituted immediately in subsequent months. In other words, consumers reacted to the temporary tax cut but the effect was small and transitory.
### 1. Introduction

The purpose of this paper is to evaluate the consumer reaction to the 1994 tax cut, which was the first among a number of tax reductions undertaken by the Japanese government in the 1990s. The 1994 tax cut was called a “special tax cut”, implying that the tax cut is temporary. If consumers behave according to the canonical permanent income hypothesis, a temporary tax cut would not affect current consumption since it does not alter permanent income. If consumers are “excessively sensitive” to changes in current income, however, he might respond to temporary tax cuts. Therefore, temporary tax cuts episodes offer nice “natural experiments” to test the permanent income hypothesis.

The 1994 tax cut is uniquely suited to this type of analysis. First, the tax cut was the first administered by the Japanese government in the 1990s. There were no tax reductions between the late 1980's and 1993 and therefore there is not concern that the effects of previous tax cuts undertaken before the 1994 tax cut might overlap. Second, the 1994 tax cut consists of only a temporary tax cut. The 1995, 1996 and 1999 tax cuts consist of both permanent (institutional) and temporary cuts. Third, many characteristics of the 1994 tax cut are similar to the 1998 tax cut and the 1999 shopping coupons program, which were also temporary. These two episodes have been already analyzed by past research and it is possible to compare the 1994 tax cut with those other events.

Quantitative assessment of tax reductions is an important topic for policy makers and academic researchers. Nonetheless, it is surprising that few studies quantitatively evaluate Japan’s tax cuts episodes. There is no empirical research on these tax cuts using micro-level consumer data except Part I, which tackles with the 1998 tax cut episode and Hori, Hsieh, Murata and Shimizutani (2002), which analyzes the shopping coupon program in 1999. Like these two papers, this study utilizes micro-level data of consumers available from the Family Income and Expenditure Survey (henceforth, FIES), monthly consumption data complied by the Japanese government.

This paper is organized as follows. The next section gives a survey of related literature and then Section 3 describes the 1994 tax cut policy. Section 4 provides a description of the data and calculation of tax reduction. Section 5, the main part of this paper, describes the methodology used to evaluate the effects of the 1994 tax cut on consumption. The last section concludes by highlighting policy implications of this study.

### 2. Literature survey

There is little empirical research quantitatively assessing the effectiveness of Japanese tax cuts in the 1990s.

Watanabe et al.(1999) tackles the empirical assessment of Japanese tax cuts after the mid 1970's, distinguishing temporary and permanent as well as anticipated and unanticipated tax changes. They find that the impact of temporary tax reductions is significantly smaller than that of permanent.
cuts and that 80% of Japanese consumers respond to tax changes at their implementation, not at their announcement.

The other quantitative work on tax reduction in Japan is Carroll (1999). Based on the theory of habit formation behaviors, he argues that the immediate marginal propensity to consume out of permanent shocks should be much less one. Carroll evaluates that “the immediate MPC out of permanent tax cuts may be as low as 30%, suggesting that calls for permanent income tax cuts as a quick means of stimulating aggregate demand in Japan may be misguided”.

These findings are not fully convincing partly because of the analysis lacked micro-level data. The impact of tax reductions on consumption is plausibly different across households with different characteristics or different liquidity constraints and it is critically important to consider the heterogeneity of consumers in evaluating the tax change effect. Hori, Hsieh, Murata and Shimizutani (2002) analyze the effect of the 1999 Japanese shopping coupon program on consumption using micro-level data and conclude that the MPC out of the coupons was 0.3-0.4 in the first month the coupons were distributed and only 0.1 over subsequent months. Part I uses the same data set to compare the impact of the 1999 shopping coupons program with the impact of the 1998 tax cut. The study demonstrates that while the effects on consumption are roughly comparable, the 1998 tax cut and the 1999 coupon program affected consumption of different types of goods.

As for the US case, Blinder (1981) and Poterba (1988) use aggregate consumption data and find that a temporary income tax cut in 1975 had significant effects on consumption. Shapiro and Slemrod (1995) utilize survey data to evaluate the effect of the reduction in standard rates of tax withholding on consumption in 1992. They conclude that 43% of the sample planned to spend most of the extra take-home pay. However, using the same survey method for the same sample, Shapiro and Slemrod (2001) show that only 22 percent of households which got a tax rebate in 2001 expected to spend it.

### 3. The 1994 tax cut

The 1994 tax reduction was announced on February 10 1994 and implemented in June and December of 1994 $ ^{1} $ . This was the first tax cut in the 1990s, implemented with the aim of stimulating the weak economy after the collapse of the “Bubble economy”. It was also administered in anticipation of an increase in the consumption tax rate, planned for 1997. This tax reduction was thought to be temporary and was to be ended in the following year. The total amount was 5,500 billion yen. Ishi (2001) wrote,
“ a temporary reduction of 5,500 billion yen in individual income taxes was actually enforced in 1994, which it had been planned to terminate in the following year. Thus, the 1994 tax reduction was originally thought of as a single-year cut on an ad hoc basis.” $ ^{2} $

Under this tax reduction program, in principle, 20 % of total income tax paid between January and June was refunded in June (the upper limit was one million yen) and 20% of income tax paid between July and December was refunded in December 1994. The limitation to be refunded was two million yen as a whole. In addition, the local inhabitants' tax was reduced. The inhabitants' tax payment was suspended in June and July and between August 1994 and May 1995 the upper limit of 200,000 yen was reduced by 20%. $ ^{3} $

As discussed below, this research focuses on investigating the response of workers' households whose tax payment is withheld at source. In Japan, monthly national income tax withholding is determined through the "withholding table" based on the number of dependants and taxable income of a household. The local inhabitant's tax is a fixed amount per month between June and May based upon the previous year's annual income. Both tax payments are withheld by salary payers and thus the amounts are exogenously determined.

### 4. Data Description and Tax Cut Calculation

The data used in this study is the micro-level data from the Family Income and Expenditure Survey (FIES). $ ^{4} $ Each household is surveyed for six months and one–sixth of the households are replaced by new households every month, making it possible to construct six-month panels. In order to improve the reliability of our estimates, a household is excluded if (1) the reported age of the household head decreases or increases by more than one year during 6 months or; (2) the household's tenancy status changes from owner to renter or the reverse or; (3) if the number of family members is greater than 10.

Moreover, we aggregate the different consumption items into four categories: durables, semi-durables, non-durables, and services. The summary statistics of the panels used in this paper can be seen in Table 1.

The national income tax cut amounts for individual households are calculated as follows.

(A1) Tax cut amount = Tax6*-Tax6=0.2*(Tax1+Tax2+Tax3+Tax4+Tax5+Tax6*)
where Tax1-Tax5 are tax payment in each month between January and May and Tax6 $ ^{*} $ is tax payment in June without tax reduction, which is not available in the FIES.

Rearranging (A1), we get

$$ (A2)Tax cut amount=(0.2^{*}(Tax1+Tax2+Tax3+Tax4+Tax5)+Tax6)/0.8-Tax6 $$

where all variables in the right hand side are available. If the calculated tax cut amount is greater than one million yen, it is set to be one million yen.

In addition to calculating national income tax cuts, it is necessary to estimate the amount of local inhabitant's tax cut. The inhabitant's tax base is annual salary in the previous year and is effective from June. That is, the inhabitant tax payment from January to May in year t is based on the annual salary in year t-2 and that after June is based on the annual salary in year t-1. Apparently, the FIES collected at year t lacks information in year t-2 so that inhabitant's tax cut amount had to be determined by information beyond that available in the FIES. We used the growth rate of annual wage data from the basic survey of wage structure $ ^{5} $ by industry, age, sex and firm size matching with individual household head.

In the following sections, we will use the panels of March to August and April to September to evaluate the effect of the 1994 tax cut. The panels used in this paper should cover June and July because the national income tax cut benefit was refunded in June and the local inhabitant tax benefit was implemented in June and July. Moreover, the panels should include August or September to evaluate the total effect of the tax cut on consumption because previous studies on Japanese tax cuts such as Hori, Hsieh, Murata and Shimizutani (2002) and Part I demonstrate that the effect on impact is cancelled out in subsequent months $ ^{6} $ . Since national income tax cut amounts are based on the total tax payment between January and June, the panels beginning in March or April lack data on tax payment in January, February and/or March. We calculated tax payments in these months as the average of tax payment in months with no bonus payment.

### 5. Impact of the 1994 Tax Cut on Consumption

We begin with using the six-month panels from the FIES to estimate whether consumption changes when consumers receive tax cuts. We will compare whether consumption of families with a larger tax cut amount increases by more than families with a smaller tax cut amount, controlling for the cross-sectional differences between similar families in other years.

The basic empirical specification employed to evaluate the effect of temporary tax cuts on consumption is the following linear Euler equation: