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Progressive Income Taxes and the Substitution Effect of RRSPs

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  • Christopher Ragan

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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Bibliographic 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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Cited by:
  1. 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.
  2. Rydqvist, Kristian & Schwartz, Steven & Spizman, Joshua, 2011. "The Tax Benefit of Income Smoothing," CEPR Discussion Papers 8425, C.E.P.R. Discussion Papers.
  3. Milligan, Kevin, 2003. "How do contribution limits affect contributions to tax-preferred savings accounts?," Journal of Public Economics, Elsevier, vol. 87(2), pages 253-281, February.
  4. 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.

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