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The Impact of the 1986 Tax Reform Act on Personal Saving

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  • Jonathan Skinner
  • Daniel Feenberg

Abstract

Many critics believed that the Tax Reform Act of 1986 (TRA86) would discourage saving. Yet personal saving rates have rebounded since 1987. This rebound might have been caused by a general decline in marginal tax rates on household saving. And we estimate, at least for the 1980s, a positive elasticity of saving with respect to the after-tax rate of return. But the tax changes alone cannot account for the recent upswing in saving rates. Furthermore, the positive saving elasticity during the 1980s is fleeting and fragile; during the entire postwar period the correlation between the after-tax rate of return and personal saving is at most zero. We also consider three alternative ways by which the Tax Reform Act could have affected personal saving. First, the cutbacks in IRA eligibility were viewed by some as discouraging saving. But conventionally measured personal saving increased after IRA enrollment plummeted in 1987. We show that this anomalous finding may be an artifact of how personal saving is measured, since a different measure - - the real change in household wealth - - grew strongly during the mid-l98Os, before leveling off after 1987. Second, the phasing out of personal credit interest deductions in TRA86 could have discouraged borrowing and thereby stimulated national saving. We find that wealthier taxpayers simply shuffled their personal credit loans into tax-deductible housing mortgages with little net effect on aggregate saving. Finally, saving could have been reduced in 1986 if taxpayers, rushing to realize capital gains before TRA86, spent their proceeds on bit-ticket consumption goods. We also find little evidence in favor of this view, although we do find much of the capital gains ended up in interest-bearing accounts. In sum, TRAB6 had more impact on the composition than on the overall level of saving.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3257.

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Date of creation: Feb 1990
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Handle: RePEc:nbr:nberwo:3257

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References

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  1. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  2. Steven F. Venti & David A. Wise, 1991. "The Saving Effect of Tax-deferred Retirement Accounts: Evidence from SIPP," NBER Chapters, in: National Saving and Economic Performance, pages 103-130 National Bureau of Economic Research, Inc.
  3. Daniel Feenberg & Jonathan Skinner, 1989. "Sources of IRA Saving," NBER Chapters, in: Tax Policy and the Economy, Volume 3, pages 25-46 National Bureau of Economic Research, Inc.
  4. Makin, John H & Couch, Kenneth A, 1989. "Saving, Pension Contributions, and the Real Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 401-07, August.
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  8. Alan J. Auerbach, 1988. "Capital Gains Taxation in the United States: Realizations, Revenue, and Rhetoric," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 595-638.
  9. Bradford, D.F., 1989. "Market Value Us. Financial Accounting Measures Of National Saving," Papers 34, Princeton, Woodrow Wilson School - Discussion Paper.
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  12. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "Replacing the Personal Income Tax with a Progressive Consumption Tax," NBER Chapters, in: A General Equilibrium Model for Tax Policy Evaluation, pages 171-187 National Bureau of Economic Research, Inc.
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  15. 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.
  16. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Chapters, in: Tax Policy and the Economy, Volume 3, pages 47-68 National Bureau of Economic Research, Inc.
  17. Venti, Steven F & Wise, David A, 1986. "Tax-Deferred Accounts, Constrained Choice and Estimation of Individual Saving," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 579-601, August.
  18. Hamilton, James D, 1985. "Uncovering Financial Market Expectations of Inflation," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1224-41, December.
  19. Lawrence H. Summers, 1982. "Tax Policy, the Rate of Return, and Savings," NBER Working Papers 0995, National Bureau of Economic Research, Inc.
  20. Hayashi, Fumio & Sims, Christopher A, 1983. "Nearly Efficient Estimation of Time Series Models with Predetermined, but Not Exogenous, Instruments," Econometrica, Econometric Society, vol. 51(3), pages 783-98, May.
  21. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  22. Michael J. Boskin, 1988. "Issues in the Measurement and Interpretation of Saving and Wealth," NBER Working Papers 2633, National Bureau of Economic Research, Inc.
  23. Manchester, Joyce M. & Poterba, James M., 1989. "Second mortgages and household saving," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 325-346, May.
  24. Bovenberg, A. Lans, 1989. "Tax Policy and National Saving in the United States: A Survey," National Tax Journal, National Tax Association, vol. 42(2), pages 123-38, June Cita.
  25. E. Philip Howrey & Saul H. Hymans, 1978. "The Measurement and Determination of Loanable-Funds Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 655-685.
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Cited by:
  1. Steven M. Fazzari & Benjamin Herzon, 1998. "Capital Gains Tax Cuts, Investment, and Growth," Macroeconomics 9811006, EconWPA.
  2. Martin Gervais & Manish Pandey, 2008. "Who Cares About Mortgage Interest Deductibility?," Canadian Public Policy, University of Toronto Press, vol. 34(1), pages 1-24, March.
  3. Uhlig, Harald & Yanagawa, Noriyuki, 1996. "Increasing the capital income tax may lead to faster growth," European Economic Review, Elsevier, vol. 40(8), pages 1521-1540, November.
  4. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers 9807, University of Western Ontario, Department of Economics.
  5. Skinner, Jonathan, 1996. "The dynamic efficiency cost of not taxing housing," Journal of Public Economics, Elsevier, vol. 59(3), pages 397-417, March.
  6. 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.
  7. Jappelli, Tullio & Pistaferri, Luigi, 2007. "Do people respond to tax incentives? An analysis of the Italian reform of the deductibility of home mortgage interests," European Economic Review, Elsevier, vol. 51(2), pages 247-271, February.

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