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The After-Tax Rate of Return Affects Private Savings

  • Summers, Lawrence H

This paper reviews theoretical argumrents and empirical evidence regarding the interest elasticity of savings. It concludes that there are strong theoretical reasons to expect an increase in after tax rates of return to increase private savings. Moreover, the empirical rrethods used in most previous studies are likely to produce underestimates of the interestelasticity of savings. New evidence based on direct estimation of utility function parameters suggests that savings are likely to be highly interest elastic. The paper concludes by noting that too little time has passed to evaluate the effects of the savings incentives contained in recent tax legislation.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 74 (1984)
Issue (Month): 2 (May)
Pages: 249-53

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Handle: RePEc:aea:aecrev:v:74:y:1984:i:2:p:249-53
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  1. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  2. Kotlikoff, Laurence J & Summers, Lawrence H, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 706-32, August.
  3. Alan J. Auerbach & Laurence J. Kotlikoff, 1981. "An Examination of Empirical Tests of Social Security and Savings," NBER Working Papers 0730, National Bureau of Economic Research, Inc.
  4. Lawrence H. Summers, 1982. "Tax Policy, the Rate of Return, and Savings," NBER Working Papers 0995, National Bureau of Economic Research, Inc.
  5. Seidman, Laurence S, 1983. "Taxes in a Life Cycle Growth Model with Bequests and Inheritances," American Economic Review, American Economic Association, vol. 73(3), pages 437-41, June.
  6. 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.
  7. Seidman, Laurence S. & Maurer, Stephen B., 1982. "Taxes and capital intensity in a two-class disposable income growth model," Journal of Public Economics, Elsevier, vol. 19(2), pages 243-259, November.
  8. Evans, Owen J, 1983. "Tax Policy, the Interest Elasticity of Saving, and Capital Accumulation: Numerical Analysis of Theoretical Models," American Economic Review, American Economic Association, vol. 73(3), pages 398-410, June.
  9. Weber, Warren E, 1975. "Interest Rates, Inflation, and Consumer Expenditures," American Economic Review, American Economic Association, vol. 65(5), pages 843-58, December.
  10. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
  11. 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.
  12. 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.
  13. 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.
  14. Shapiro, Matthew D., 1984. "The permanent income hypothesis and the real interest rate : Some evidence from panel data," Economics Letters, Elsevier, vol. 14(1), pages 93-100.
  15. 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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