At Free Exchange, Allison Schrager draws our attention to new research from Raj Chetty, John Friedman, Soren Leth-Petersen, Torben Heien Nielsen, and Tore Olsen:
Tax-advantaged savings accounts have become popular in developed economies as a way to promote saving for retirement. You can put pre-tax money into an account you can’t access (without a penalty) until you retire. It accrues while you work and then you pay taxes on the account, once you reach retirement. The hope is that the tax-deferral promotes retirement saving. But the new paper, using Danish tax data, finds that most people are passive savers: they don’t respond to tax incentives. The most effective way to encourage saving is to default people into contributing to retirement saving accounts, regardless of tax-treatment.
As Allison goes on to observe, however, the tax preference for savings applies to employers as well as employees, and it does appear to encourage employers to offer savings accounts that do increase savings. Moreover, she explains that the savings accounts in question are not tax-exempt but rather tax-deferred:
The actual loss to the government depends on tax rates and income decades from now. It’s therefore hard to say how much revenue is lost with these accounts. If taxes are high enough in the future, taking into account the current low cost of borrowing, the government may come out ahead revenue-wise.
Making a grab for the revenue now is really just taking revenue from future tax-payers. Not counting uncertain revenue so far into the future may be a typical accounting convention, but in this case it should be considered when figuring inter-generational trade-offs.
For a variety of reasons, it seems fairly likely that taxes will be considerably higher in the future than they are today. So perhaps it makes sense to embrace tax-deferred savings accounts as a far-sighted revenue-raising strategy — one that will leave those who took advantage of tax-deferred savings accounts feeling rather disappointed.