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"Back-Loaded" Tax Subsidies for Saving, Asset Location and Crowd-Out: Evidence from Tax-Free Savings Accounts

Adam Lavecchia ()

Department of Economics Working Papers from McMaster University

Abstract: This paper presents estimates of the causal effect of Canadian Tax-Free Savings Accounts (TFSAs) balances on household saving and portfolio asset location choices. Contributions to TFSAs are not tax-deductible but capital income earned in the account accrues tax-free and withdrawals are not taxed. Using a difference-in-differences research design that exploits the sharp change in a family’s cumulative TFSA contribution room that arises when a family member turns 18 years old, I find that a 10 percent increase in TFSA balances reduces taxable financial asset holdings by 2.5 percent with no statistically significant effect on holdings in traditional tax-deferred accounts. I also find that the crowd-out in taxable asset holdings is driven by families reducing the share of their taxable financial assets held in fixed income securities

Keywords: Tax-preferred savings accounts; back-loaded versus front-loaded subsidies; Tax-Free Savings Accounts; crowd-out (search for similar items in EconPapers)
JEL-codes: D14 H31 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2019-06
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
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Handle: RePEc:mcm:deptwp:2019-04