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Alternative Tax Rules and Personal Saving Incentives: Microeconomic Data and Behavioral Simulations

In: Behavioral Simulation Methods in Tax Policy Analysis

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  • Martin S. Feldstein
  • Daniel R. Feenberg

Abstract

This study examines the potential effects on personal savings of alternative types of tax rules. The analysis makes use of two extensive samples of information on individual savings and financial income: the 1972 Consumer Expenditure Survey and a stratified random sample of 26,000 individual tax returns for that year. The first type of tax rule that we consider would permit all tax-payers to make tax deductible contributions to individual savings accounts. The interest and dividends earned in these accounts would also accumulate untaxed. A potential problem with any such plan is that Individuals could in principle obtain tax deductions without doing any additional saving merely by transferring pre-existing assets into the special accounts. The evidence that we have examined indicates that this Is not likely to be important in practice since most taxpayers currently have little or no financial assets with which to make such transfers. For example, a plan permitting contributions of 10 percent of wages up to $2000 a year would exhaust all the pre-existing assets of 75 per-cent of households in just 2 years. Our evidence also shows that a ceiling on annual contributions of 10 percent of wages still leaves an increased saving incentive for more than 80 percent of households since fewer than 20 percent of households currently save as much as 10 percent a year. Specific simulations of a variety of such proposals show that even when income and substitution effects balance for a representative taxpayer (implying no change in his consumption) aggregate saving would rise considerably. The second type of tax rule that we examine would increase the current $200 interest and dividend exclusion. In 1972, among families with incomes of $20,000 to $30,000, 55 percent had more than $200 of interest and dividends; for those with incomes of at least $30,000, 82 percent had more than $200 of interest and dividends. For such families, the$200exclusion provides no incentive for additiona
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Suggested Citation

  • Martin S. Feldstein & Daniel R. Feenberg, 1983. "Alternative Tax Rules and Personal Saving Incentives: Microeconomic Data and Behavioral Simulations," NBER Chapters,in: Behavioral Simulation Methods in Tax Policy Analysis, pages 173-210 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:7709
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    References listed on IDEAS

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    1. Green, Jerry R & Sheshinski, Eytan, 1978. "Optimal Capital-Gains Taxation under Limited Information," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1143-1158, December.
    2. M. S. Feldstein & S. C. Tsiang, 1968. "The Interest Rate, Taxation, and the Personal Savings Incentive," The Quarterly Journal of Economics, Oxford University Press, vol. 82(3), pages 419-434.
    3. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    4. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    5. Feldstein, Martin S, 1970. "Inflation, Specification Bias, and the Impact of Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 78(6), pages 1325-1339, Nov.-Dec..
    6. Lawrence H. Summers, 1978. "Tax Policy in a Life Cycle Model," NBER Working Papers 0302, National Bureau of Economic Research, Inc.
    7. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
    8. Charles Becker & Don Fullerton, 1980. "Income Tax Incentives to Promote Saving," NBER Working Papers 0487, National Bureau of Economic Research, Inc.
    9. Mirrlees, J. A., 1976. "Optimal tax theory : A synthesis," Journal of Public Economics, Elsevier, pages 327-358.
    10. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters,in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Eric M. Engen & William G. Gale & John Karl Scholz, 1996. "The Illusory Effects of Saving Incentives on Saving," Journal of Economic Perspectives, American Economic Association, pages 113-138.
    2. R. Glenn Hubbard & Jonathan S. Skinner, 1996. "Assessing the Effectiveness of Saving Incentives," Journal of Economic Perspectives, American Economic Association, pages 73-90.
    3. Eric M. Engen & William G. Gale & John Karl Scholz, 1996. "The Effects of Tax-Based Saving Incentives On Saving and Wealth," NBER Working Papers 5759, National Bureau of Economic Research, Inc.
    4. 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.
    5. Martin Feldstein, 1982. "Private Pensions as Corporate Debt," NBER Chapters,in: The Changing Roles of Debt and Equity in Financing U.S. Capital Formation, pages 75-90 National Bureau of Economic Research, Inc.
    6. Joel Slemrod, 1985. "The Impact of Tax Reform on Households," NBER Working Papers 1765, National Bureau of Economic Research, Inc.
    7. Jonathan Skinner, 1991. "Individual Retirement Accounts: A Review of the Evidence," NBER Working Papers 3938, National Bureau of Economic Research, Inc.
    8. Ayşe İmrohoroğlu & Selahattin İmrohoroğlu & Douglas H. Joines, 2003. "Time-Inconsistent Preferences and Social Security," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 745-784.

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