Taxes on savings

8 important questions on Taxes on savings

What is capital income taxation?

The taxes levied on the returns from savings

What is the intertemporal choice model?

The choice individuals make about how to allocate their consumption over time. It focuses on the trade off between consumption today and consumption tomorrow.

In which two ways do taxes and other price changes affect savings? What do empirics say?

Substitution effect: Lower-after tax interest rates cause first-period consumption to rise, reducing savings

Income effect: lower after-tax interest rates reduce the lifetime value of income, reducing first-period consumption and increasing savings

Evidence is ambiguous: either no impact or positive (income effect)
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Why is studying the connections between after-tax interest rate and savings difficult?

1 Hard to measure the relevant interest rate

2 Interest on any type of savings typically changes over time in the same way for all individuals, making it hard to find appropriate treatment and control groups

The traditional model assumes that people only save to smooth consumption, not to self-insure. Which model states against this? And explain it.

Precautionary savings model: a model of savings in which individuals save, at least partly, to smooth consumption over future uncertainties

What is a pension plan?

An employer sponsored plan through which employers and employees save on a (generally) tax-free basis for the employees' retirement

What is the difference between DB pension plans and DC?

DB: upon retirement, the worker's benefit depends on tenure and eanrings

DC: employers set aside a certian proportion of a worker's earnings in an investment account, and upon retirement, the worker receives the investment and any earnings

What is some evidence on tax incentives and savings?

1. Evidence from recent studies suggests that individuals do respond to these savings incentives by saving more - and might even respond enough to raise not only private but national savings.

2. Several studies suggest that opt-out policies of enrollment have an even larger impact on savings than do tax subsidies

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