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The effect of tax-based savings incentives on government revenue

  • Giuseppe Ruggieri
  • Maxime Fougère
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    There is an unresolved debate on the effect of tax-based savings incentives on government revenue. The conventional wisdom on tax-assisted saving plans (TASPs) holds that they reduce public savings, but may raise national savings by stimulating private savings. Feldstein (1995) has challenged the view that TASPs reduce government revenue. According to Feldstein, ‘some of the increase in personal saving raises the corporate capital stock, and the return on this additional capital raises corporate tax payments’. When the additional corporate income tax revenue is taken into account, ‘the revenue loss associated with IRAs [Individual Retirement Accounts] either is much smaller than has generally been estimated or is actually a revenue gain’. This paper extends Feldstein’s analysis to incorporate international considerations,differences in tax structures and alternative values for key parameters. We show that the result presented by Feldstein represents a special case that does not lead to broad generalisations. We also show that, under most conditions, the tenets of conventional wisdom that TASPs reduce government revenue are likely to hold, but that the magnitude of the effect may not be large. Finally, we suggest that the focus of research on the savings effects of TASPs is justifiable in a closed economy, where domestic savings affect domestic investment, but is not useful for policy development in small open economies.

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    Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

    Volume (Year): 18 (1997)
    Issue (Month): 2 (May)
    Pages: 143-159

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    Handle: RePEc:ifs:fistud:v:18:y:1997:i:2:p:143-159
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    1. Gale, W.G. & scholz, J.K., 1992. "IRAS and Household Saving," Papers 9244, Tilburg - Center for Economic Research.
    2. Steven F. Venti & David A. Wise, 1987. "Have IRAs Increased U.S. Saving?: Evidence from Consumer Expenditure Surveys," NBER Working Papers 2217, National Bureau of Economic Research, Inc.
    3. R. Glenn Hubbard & Jonathan S. Skinner, 1996. "Assessing the Effectiveness of Saving Incentives," Books, American Enterprise Institute, number 53540, September.
    4. David A. Wise, 1987. "Individual Retirement Accounts and Saving," NBER Chapters, in: Taxes and Capital Formation, pages 3-16 National Bureau of Economic Research, Inc.
    5. Feldstein, Martin, 1995. "The Effects of Tax-Based Saving Incentives on Government Revenue and National Saving," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 475-94, May.
    6. Jane G. Gravelle, 1991. "Do Individual Retirement Accounts Increase Savings?," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 133-148, Spring.
    7. R. Glenn Hubbard & Jonathan S. Skinner, 1996. "Assessing the Effectiveness of Saving Incentives," NBER Working Papers 5686, National Bureau of Economic Research, Inc.
    8. James M. Poterba & Steven F. Venti & David A. Wise, 1996. "How Retirement Saving Programs Increase Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 91-112, Fall.
    9. Murphy, Robert G., 1984. "Capital mobility and the relationship between saving and investment rates in OECD countries," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 327-342, December.
    10. 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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