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Long-Run Changes in Tax Expenditures on 401(K)-Type Retirement Plans

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  • Lurie, Ithai Z.
  • Ramnath, Shanthi P.

Abstract

In this paper, we explore the long-run revenue consequences of the tax deferral of contributions to 401(k)-type retirement plans. We use net present value (NPV) calculations to measure the long-run cost of contributions made in 2008. We show that the long-run NPV cost can be dramatically different if measured using relatively short time horizons, depending on assumptions regarding the rate of return on investments, the government’s discount rate on future payments, marginal tax rates, and taxpayers’ retirement behavior. Finally, we estimate the effect of limiting the maximum total contributions to 401(k)-type plans to $10,000 and find that even at high rates of return, the NPV cost of the tax expenditure declines at most by $33 billion or 21.1 percent.

Suggested Citation

  • Lurie, Ithai Z. & Ramnath, Shanthi P., 2011. "Long-Run Changes in Tax Expenditures on 401(K)-Type Retirement Plans," National Tax Journal, National Tax Association, vol. 64(4), pages 1025-1038, December.
  • Handle: RePEc:ntj:journl:v:64:y:2011:i:4:p:1025-38
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    References listed on IDEAS

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    1. Ackerman, Deena & Auten, Gerald, 2006. "Floors, Ceilings, and Opening the Door for a Non–Itemizer Deduction," National Tax Journal, National Tax Association, vol. 59(3), pages 509-530, September.
    2. Saez, Emmanuel, 2004. "The optimal treatment of tax expenditures," Journal of Public Economics, Elsevier, pages 2657-2684.
    3. Martin Feldstein & Daniel Feenberg & Maya MacGuineas, 2011. "Capping Individual Tax Expenditure Benefits," NBER Working Papers 16921, National Bureau of Economic Research, Inc.
    4. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-1458, December.
    5. Charles T. Clotfelter, 1990. "The Impact of Tax Reform on Charitable Giving: A 1989 Perspective," NBER Working Papers 3273, National Bureau of Economic Research, Inc.
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