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How Do Contribution Limits Affect Contributions to Tax-Preferred Savings Accounts?

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  • Kevin Milligan

Abstract

Contributions to tax-preferred savings accounts are typically constrained by a contribution limit. These limits influence contributions not just in periods in which they bind, but in other periods as well. I develop a simple life-cycle model in which consumers exhibit "use-it-or-lose-it" contribution behaviour. This connects current contributions to future contribution limits, which leads to the result that an increase in contribution limits can decrease contributions. Empirical evidence provides support for the model--larger future contribution room is associated with smaller contributions.

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Bibliographic Info

Paper provided by McMaster University in its series Social and Economic Dimensions of an Aging Population Research Papers with number 27.

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Length: 40 pages
Date of creation: Aug 2000
Date of revision:
Handle: RePEc:mcm:sedapp:27

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Keywords: income tax; saving;

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References

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  1. Burman, Leonard E. & Cordes, Joseph J. & Ozanne, Larry, 1990. "IRAs and National Savings," National Tax Journal, National Tax Association, vol. 43(3), pages 259-83, September.
  2. Long, James E., 1990. "Marginal Tax Rates and IRA Contributions," National Tax Journal, National Tax Association, vol. 43(2), pages 143-53, June.
  3. Gale, W.G. & scholz, J.K., 1992. "IRAS and Household Saving," Papers 9244, Tilburg - Center for Economic Research.
  4. John B. Shoven & Clemens Sialm, 1999. "Asset Location in Tax-Deferred and Conventional Savings Accounts," NBER Working Papers 7192, National Bureau of Economic Research, Inc.
  5. Michael R. Veall, 1999. "Did Tax Flattening Affect RRSP Contributions?," Department of Economics Working Papers 1999-04, McMaster University.
  6. Jane G. Gravelle, 1991. "Do Individual Retirement Accounts Increase Savings?," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 133-148, Spring.
  7. Venti, Steven F & Wise, David A, 1990. "Have IRAs Increased U.S. Saving? Evidence from Consumer Expenditure Surveys," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 661-98, August.
  8. James M. Poterba & Steven F. Venti, 1998. "Personal Retirement Saving Programs and Asset Accumulation: Reconciling the Evidence," NBER Chapters, in: Frontiers in the Economics of Aging, pages 23-124 National Bureau of Economic Research, Inc.
  9. B. Douglas Bernheim, 1999. "Taxation and Saving," NBER Working Papers 7061, National Bureau of Economic Research, Inc.
  10. Triest, Robert K., 1998. "Econometric Issues in Estimating the Behavioral Response to Taxation: A Nontechnical Introduction," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 761-72, December.
  11. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
  12. Christopher Ragan, 1994. "Progressive Income Taxes and the Substitution Effect of RRSPs," Canadian Journal of Economics, Canadian Economics Association, vol. 27(1), pages 43-57, February.
  13. R. Glenn Hubbard & Jonathan S. Skinner, 1996. "Assessing the Effectiveness of Saving Incentives," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 73-90, Fall.
  14. Androkovich, Robert A. & Daly, Michael J. & Naqib, Fadle M., 1992. "The impact of a hybrid personal tax system on capital accumulation and economic welfare," European Economic Review, Elsevier, vol. 36(4), pages 801-813, May.
  15. Alan J. Auerbach & Joel Slemrod, 1997. "The Economic Effects of the Tax Reform Act of 1986," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 589-632, June.
  16. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
  17. Michael J. Daly, 1981. "The Role of Registered Retirement Savings Plans in a Life-Cycle Model," Canadian Journal of Economics, Canadian Economics Association, vol. 14(3), pages 409-21, August.
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Cited by:
  1. Richard Disney & Carl Emmerson & Matthew Wakefield, 2007. "Pension Provision and Retirement Saving: Lessons from the United Kingdom," Social and Economic Dimensions of an Aging Population Research Papers 176, McMaster University.
  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. Hans Fehr & Fabian Kindermann, 2010. "Pension Funding and Individual Accounts in Economies with Life-cyclers and Myopes," CESifo Economic Studies, CESifo, vol. 56(3), pages 404-443, September.
  4. Engelhardt, Gary V. & Madrian, Brigitte C., 2004. "Employee Stock Purchase Plans," National Tax Journal, National Tax Association, vol. 57(2), pages 385-406, June.
  5. Rowena Crawford & Richard Disney & Carl Emmerson, 2012. "Do up-front tax incentives affect private pension saving in the United Kingdom?," IFS Working Papers W12/05, Institute for Fiscal Studies.
  6. Rydqvist, Kristian & Schwartz, Steven T. & Spizman, Joshua D., 2014. "The tax benefit of income smoothing," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 78-88.

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