The Effects of Tax-Based Saving Incentives on Government Revenue and National Saving
NBER Working Paper No. 4021
This paper shows that previous analyses of IRA-type plans have miscalculated their effect on tax revenue and therefore on national saving by ignoring their impact on corporate tax payments. Recognizing the important effect of IRA plans on corporate tax revenue changes previous conclusions about the revenue effects of IRA plans in fundamental ways. The revenue loss associated with IRAs is either much smaller than has generally been estimated or is actually a revenue gain, depending on the time horizon and key parameter values. In addition to analyzing the effects of traditional tax-deductible IRA plans, the paper presents an alternative nontaxable IRA (in which contributions are not deductible and no subsequent tax is levied on earnings or withdrawals) and shows that, for the most plausible parameter values, the net revenue effect is positive in every year. Although each individual participant eventually withdraws all of his own contributions and accumulated earnings from his IRA account, the net impact on the national capital stock of that individual's participation remains positive even after his death because of the favorable cumulative effects on tax revenue. This is true for traditional deductible IRA plans as well as for the nontaxable IRAs.
Published: Quarterly Journal of Economics, May 1995, pp.475-494.