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Tax-Preferred Savings Accounts and Marginal Tax Rates: Evidence on RRSP Participation

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  • Kevin Milligan

Abstract

The percentage of Canadian with earned income who contributed to a Registered Retirement Savings Plan increased from 18.7 per cent in 1982 to 46.0 per cent in 1996. This period also saw many changes to the income tax structure. Using household expenditure survey data, I examine the influence of taxes on the decision to contribute to Registered Retirement Savings Plans. I improve on existing work by identifying the tax effect from within jurisdiction variation through time, rather than cross-sectional variation alone. I find that taxes do play a role in the contribution decision, but the effect of taxes is much smaller than suggested by the existing literature. A 10 percentage point increase in the marginal tax rate is estimated to increase the probability of participation by 8 per cent. This suggests that increases in marginal tax rates can explain only 5.1 per cent of the increase in Registered Retirement Savings Plan participation between 1982 and 1996. A carryforward mechanism for unused contribution room was introduced in 1991. I find evidence that the sensitivity of participation to future marginal tax rates increased after the introduction of the carryforward. This is consistent with the predictions of the model.

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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 52.

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Length: 35 pages
Date of creation: Jun 2001
Date of revision:
Handle: RePEc:mcm:sedapp:52

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Keywords: retirement savings plan; income tax rates;

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Cited by:
  1. Gary V. Engelhardt & Brigitte C. Madrian, 2004. "Employee Stock Purchase Plans," NBER Working Papers 10421, National Bureau of Economic Research, Inc.
  2. Sule Alan & Kadir Atalay & Thomas F. Crossley & Sung-Hee Jeon, 2009. "New Evidence on Taxes and Portfolio Choice," Quantitative Studies in Economics and Population Research Reports 431, McMaster University.
  3. Håkan Selin, 2010. "Marginal Tax Rates and Tax-Favoured Pension Savings of the Self-Employed - Evidence from Sweden," CESifo Working Paper Series 3059, CESifo Group Munich.
  4. Michael Baker & Jonathan Gruber & Kevin Milligan, 2003. "Simulating the Response to Reform of Canada's Income Security Programs," NBER Working Papers 9455, National Bureau of Economic Research, Inc.
  5. Elena Simonova & Rock Lefebvre, 2008. "How Pressing is it to Revisit the Treatment of Capital Gains?," Working Papers 081203, Certified General Accountants Association of Canada.
  6. Juan Ayuso & Juan F. Jimeno & Ernesto Villanueva, 2007. "The effects of the introduction of tax incentives on retirement savings," Banco de Espa�a Working Papers 0724, Banco de Espa�a.
  7. Sule Alan & Kadir Atalay & Thomas F. Crossley, 2006. "Do the Rich Save More in Canada?," Quantitative Studies in Economics and Population Research Reports 406, McMaster University.
  8. Michael Baker & Jonathan Gruber & Kevin Milligan, 2007. "Simulating the Response to Reform of Canada," NBER Chapters, in: Social Security Programs and Retirement around the World: Fiscal Implications of Reform, pages 83-118 National Bureau of Economic Research, Inc.

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