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Progressive Income Taxes and the Substitution Effect of RRSPs

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Author Info
Christopher Ragan

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Abstract

Within a progressive income-tax system, Registered Retirement Saving Plans (RRSPs) generate a substitution effect that decreases saving. The key point made here is that when an RRSP is introduced to a system that taxes capital income, the rate of return on marginal saving within the RRSP is driven to equality with the rate of return on non-RRSP saving. Since RRSP contributions redistribute taxable income across periods, they also have the effect of increasing future marginal income-tax rates, which lowers the after-tax return to saving. This result stands in contrast to the conventional view from the public finance literature.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 27 (1994)
Issue (Month): 1 (February)
Pages: 43-57
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Handle: RePEc:cje:issued:v:27:y:1994:i:1:p:43-57

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  1. Giuseppe Ruggieri & Maxime Fougère, 1997. "The effect of tax-based savings incentives on government revenue," Fiscal Studies, Institute for Fiscal Studies, vol. 18(2), pages 143-159, May. [Downloadable!]
  2. John Burbidge & Deborah Fretz & Michael R. Veall, 1998. "Canadian and American Saving Rates and the Role of RRSPs," Canadian Public Policy, University of Toronto Press, vol. 24(2), pages 259-263, June. [Downloadable!] (restricted)
  3. Kevin Milligan, 2000. "How Do Contribution Limits Affect Contributions to Tax-Preferred Savings Accounts?," Social and Economic Dimensions of an Aging Population Research Papers 27, McMaster University. [Downloadable!]
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