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The Taxation of Pensions: A Shelter can Become a Trap

  • John B. Shoven
  • David A. Wise

Pensions are widely thought to be attractive tax shelters which encourage saving for retirement. They allow people to save before-tax dollars and to compound investment returns without current taxation. However, the taxation of pension assets as they are distributed in retirement or as they pass through an estate may turn the shelter into a trap, at least for large pension accumulations. Pension distributions can face marginal tax rates as high as 61.5 percent; pension assets passing through an estate can face virtually confiscatory marginal tax rates between 92 and 99 percent. The analysis of this paper shows the circumstances under which these extraordinarily high marginal tax rates will be encountered. They are not limited to the rich. In fact, people of modest incomes who participate in a pension plan over a long career may face such rates. The paper presents a comprehensive examination of the taxation of pensions and discusses the optimal responses of households to the incentives created by the tax system.

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File URL: http://www.nber.org/papers/w5815.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5815.

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Date of creation: Nov 1996
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Publication status: published as Frontiers in the Economics of Aging. Edited by David Wise, Chicago: The University of Chicago Press, 1998, pp. 173-212.
Handle: RePEc:nbr:nberwo:5815
Note: AG PE
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  1. N. Gregory Mankiw & James M. Poterba, 1996. "Stock Market Yields and the Pricing of Municipal Bonds," NBER Working Papers 5607, National Bureau of Economic Research, Inc.
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