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Tax Policy, the Rate of Return, and Savings

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Lawrence H. Summers

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Abstract

The theoretical and empirical results in this paper make a strong prima facie case for the proposition that increases in the after tax rate of return caused by tax policy are likely to bring forth significant increases in saving. Theoretical analysis using a variety of standard models tends to suggest that the aggregate response to savings incentives is likely to be substantial. It is argued that the existing empirical evidence sheds little light on the question. Empirical analyses are then conducted using three alternative approaches. All three confirm the hypothesis of a significant positive response of savings to changes in the rate of return.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0995.

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Date of creation: Sep 1982
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Handle: RePEc:nbr:nberwo:0995

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kotlikoff, Laurence J & Spivak, Avia, 1981. "The Family as an Incomplete Annuities Market," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 372-91, April. [Downloadable!] (restricted)
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  2. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September. [Downloadable!] (restricted)
  3. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January. [Downloadable!] (restricted)
  5. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1986. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April. [Downloadable!] (restricted)
  7. Martin Feldstein, 1985. "Social Security Benefits and the Accumulation of Preretirement Wealth," NBER Working Papers 0477, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec.. [Downloadable!] (restricted)
  9. Lawrence H. Summers, 1981. "Inflation and the Valuation of Corporate Equities," NBER Working Papers 0824, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Robert E. Hall & Frederic S. Mishkin, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October. [Downloadable!] (restricted)
  12. Laurence J. Kotlikoff & Lawrence H. Summers, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," NBER Working Papers 0445, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December. [Downloadable!] (restricted)
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  14. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S3-27, April. [Downloadable!] (restricted)
  15. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Blackwell Publishing, vol. 37(3), pages 353-60, July. [Downloadable!] (restricted)
  16. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct. [Downloadable!] (restricted)
  17. Alan J. Auerbach & Laurence J. Kotlikoff, 1984. "An Examination of Empirical Tests of Social Security and Savings," NBER Working Papers 0730, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Mirer, Thad W, 1979. "The Wealth-Age Relation among the Aged," American Economic Review, American Economic Association, vol. 69(3), pages 435-43, June. [Downloadable!] (restricted)
  19. Stiglitz, Joseph E, 1978. "Notes on Estate Taxes, Redistribution, and the Concept of Balanced Growth Path Incidence," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S137-50, April. [Downloadable!] (restricted)
  20. Mankiw, N. Gregory, 1981. "The permanent income hypothesis and the real interest rate," Economics Letters, Elsevier, vol. 7(4), pages 307-311. [Downloadable!] (restricted)
  21. Weber, Warren E, 1970. "The Effect of Interest Rates on Aggregate Consumption," American Economic Review, American Economic Association, vol. 60(4), pages 591-600, September. [Downloadable!] (restricted)
  22. Chamley, Christophe, 1981. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 468-96, June. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. M. Fatih Guvenen, 2003. "A Parsimonious Macroeconomic Model for Asset Pricing: Habit Formation or Cross-sectional Heterogeneity?," RCER Working Papers 499, University of Rochester - Center for Economic Research (RCER). [Downloadable!]
    Other versions:
  2. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Jonathan Skinner & Daniel Feenberg, 1990. "The Impact of the 1986 Tax Reform Act on Personal Saving," NBER Working Papers 3257, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Christopher D. Carroll & Andrew A. Samwick, 1995. "The Nature of Precautionary Wealth," NBER Working Papers 5193, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. David Altig & Steve J. Davis, 1991. "The Timing of Intergenerational Transfers, Tax Policy, and Aggregate Savings," NBER Working Papers 3753, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Isabel Argimón & José Manuel González-Paramo & José María Roldan, 1993. "Ahorro, riqueza y tipos de interés en España," Investigaciones Economicas, Fundación SEPI, vol. 17(2), pages 313-332, May. [Downloadable!]
  7. Jerry A. Hausman & James M. Poterba, 1988. "Household Behavior and the Tax Reform Act of 1986," NBER Working Papers 2120, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Fatih Guvenen, 2005. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," Macroeconomics 0507005, EconWPA. [Downloadable!]
    Other versions:
  9. Casey B. Mulligan, 2004. "Robust Aggregate Implications of Stochastic Discount Factor Volatility," NBER Working Papers 10210, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Tuong Nhu Che & Tom Kompas & Neil Vousden, 2003. "Market Reform, Incentives and Development in Vietnamese Rice Production," International and Development Economics Working Papers idec03-7, International and Development Economics. [Downloadable!]
  11. N. Gregory Mankiw & Matthew D. Shapiro, 1987. "Risk and Return: Consumption versus Market Beta," NBER Working Papers 1399, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Chen, T.N. & Kompas, T. & Vousden, N., 1999. "Incentives and Static and Dynamic Gains from Market Reform in an Emerging Profits Models," ANUCBE School of Economics Working Papers 1999-379, Australian National University, College of Business and Economics, School of Economics. [Downloadable!]
    Other versions:
  13. Balassa, Bela, 1989. "The effects of interest rates on savings in developing countries," Policy Research Working Paper Series 56, The World Bank. [Downloadable!]
  14. John Y. Campbell, 1993. "Understanding Risk and Return," NBER Working Papers 4554, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Matthew D. Shapiro & N. Gregory Mankiw, 1985. "Risk and Return: Consumption Beta Versus Market Beta," Cowles Foundation Discussion Papers 738, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  16. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Lawrence H. Summers, 1984. "The After Tax Rate of Return Affects Private Savings," NBER Working Papers 1351, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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