Tax-Preferred Savings Accounts and Marginal Tax Rates: Evidence on RRSP Participation
AbstractThe 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 InfoPaper provided by McMaster University in its series Social and Economic Dimensions of an Aging Population Research Papers with number 52.
Length: 35 pages
Date of creation: Jun 2001
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retirement savings plan; income tax rates;
Other versions of this item:
- Kevin Milligan, 2002. "Tax-preferred savings accounts and marginal tax rates: evidence on RRSP participation," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 436-456, August.
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
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