The Taxation of Pensions: A Shelter can Become a Trap
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.
|Date of creation:||Nov 1996|
|Date of revision:|
|Publication status:||published as Frontiers in the Economics of Aging. Edited by David Wise, Chicago: The University of Chicago Press, 1998, pp. 173-212.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- N. Gregory Mankiw & James Poterba, 1996.
"Stock-Market Yields and the Pricing of Municipal Bonds,"
Harvard Institute of Economic Research Working Papers
1761, Harvard - Institute of Economic Research.
- 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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