Budgetary costs of tax facilities for pension savings: an empirical analysis
A wide variety of tax regimes for (occupational) private pension saving are in place around the world. Generally, pension saving is taxed at a relatively low rate, although the revenue loss due to tax facilities for pension savings and/or pension tax expenditures may differ across countries. A strong fiscal stimulus to build up pension capital will support funding. However, these tax facilities may become an expensive business for governments. This paper investigates the ex ante budgetary effects of a cash-flow tax regime for pension savings by full present-value calculations. The fiscal subsidy on pension savings in several (European) countries is often associated with the application of the cash-flow treatment of pensions under the personal income tax: pension contributions are tax exempt, capital income of pension funds is tax-exempt, and pension benefits are taxed, but usually the elderly aged 65 years and over are taxed at a relatively low rate. This form can be described as EET, with E denoting an exemption or relief from tax and T denoting a point at which tax is payable. Indeed, tax treatment of pension saving can have other forms as well. We consider a specified form of a comprehensive income tax system (TTE) as an appropriate benchmark. Using the TTE-benchmark, the ex ante budgetary cost of the current tax treatment of pension saving in countries can be quantified. We employ an empirical analysis for the Netherlands, because this country belongs, with its three pension pillars and its sound funding, to the leading group of countries in Europe with a solid pension system. Our calculations, using Income Panel Data from Statistics Netherlands for the years 1990-2003, show that current taxation on a cash-flow basis means on balance a major loss to the Treasury (compared to the benchmark). For the year 2003 we estimate a fiscal subsidy associated with the current Dutch tax rule of 1.2 to 1.5 percent of GDP, depending on the assumed rate of return on pension capital.
|Date of creation:||2005|
|Date of revision:|
|Publication status:||Published in Department of Economics Research Memorandum 2005.03 (2005): pp. 1-17|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pablo AntolÃn & Alain de Serres & Christine de la Maisonneuve, 2004. "Long-Term Budgetary Implications of Tax-Favoured Retirement Plans," OECD Economics Department Working Papers 393, OECD Publishing.
- Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1, September.
- Lans Bovenberg, 2002.
"Financing Retirement in the European Union,"
CESifo Working Paper Series
643, CESifo Group Munich.
- Philip Booth & Deborah Cooper, 2002. "The tax treatment of UK defined contribution pension schemes," Fiscal Studies, Institute for Fiscal Studies, vol. 23(1), pages 77-104, March.
- Koen Caminada & Kees Goudswaard, 1996. "Progression and revenue effects of income tax reform," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 57-66, January.
- David A. Wise, 2005. "Facing the age wave and economic policy: fixing public pension systems with healthcare in the wings," Fiscal Studies, Institute for Fiscal Studies, vol. 26(1), pages 5-34, April.
- Hans-Werner Sinn, 2005. "Europe’s Demographic Deficit A Plea For A Child Pension System," De Economist, Springer, vol. 153(1), pages 1-45, December.
- Kwang-Yeol Yoo & Alain de Serres, 2004. "Tax Treatment of Private Pension Savings in OECD Countries and the Net Tax Cost Per Unit of Contribution to Tax-Favoured Schemes," OECD Economics Department Working Papers 406, OECD Publishing.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:20735. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.