Tax Reform and Target Savings

Andrew Samwick

No 6640, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: If the United States switched to a broad-based consumption tax, than all forms of saving would enjoy the tax-preferred status reserved primarily for retirement saving vehicles under the current income tax system. Because pensions have other unique characteristics besides their tax advantage, current results on the effect of pensions on saving may provide an unreliable guide to the saving response to fundamental tax reform. The net effect of reform on saving depends critically on household motives for saving. This paper documents the considerable variation in the reasons why households save and presents a buffer stock model of saving that allows for both life cycle and target saving. To the extent that specific targets that are not currently tax-favored motivate the saving of households in their preretirement years, fundamental tax reform that results in the elimination of current pension plans will reduce saving.

JEL-codes: H31 E21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pub
Date: 1998-07
Note: PE
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