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How do contribution limits affect contributions to tax-preferred savings accounts?

  • Milligan, Kevin

Contributions to tax-preferred savings accounts are typically constrained by a contribution limit. These limits influence contributions not just in periods in which they bind, but in other periods as well. I develop a simple life-cycle model in which consumers exhibit "use-it-or-lose-it" contribution behaviour. This connects current contributions to future contribution limits, which leads to the result that an increase in contribution limits can decrease contributions. Empirical evidence provides support for the model--larger future contribution room is associated with smaller contributions.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 87 (2003)
Issue (Month): 2 (February)
Pages: 253-281

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Handle: RePEc:eee:pubeco:v:87:y:2003:i:2:p:253-281
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  1. R. Glenn Hubbard & Jonathan S. Skinner, 1996. "Assessing the Effectiveness of Saving Incentives," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 73-90, Fall.
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  8. Michael R. Veall, 1999. "Did Tax Flattening Affect RRSP Contributions?," Quantitative Studies in Economics and Population Research Reports 342, McMaster University.
  9. Shoven, John B. & Sialm, Clemens, 2004. "Asset location in tax-deferred and conventional savings accounts," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 23-38, January.
  10. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
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  13. Androkovich, Robert A. & Daly, Michael J. & Naqib, Fadle M., 1992. "The impact of a hybrid personal tax system on capital accumulation and economic welfare," European Economic Review, Elsevier, vol. 36(4), pages 801-813, May.
  14. Triest, Robert K., 1998. "Econometric Issues in Estimating the Behavioral Response to Taxation: A Nontechnical Introduction," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 761-72, December.
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  17. Christopher Ragan, 1994. "Progressive Income Taxes and the Substitution Effect of RRSPs," Canadian Journal of Economics, Canadian Economics Association, vol. 27(1), pages 43-57, February.
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