Taxation and Liquidity: Evidence from Retirement Savings

Elizabeth Chorvat

University of Illinois College of Business Department of Accountancy

September 2013

U of Chicago, Public Law Working Paper No. 444

The conventional wisdom among public economists and tax academics alike is that behavioral responses to changes in the taxation of investments occur predominantly among the wealthy. The 2003 reduction in the rate of taxation on dividends was thus expected to affect primarily high-income households. This paper finds that, in fact, the largest behavioral response to the 2003 dividend preference appears to have been among those households in the lowest income group. If household income is an important determinant to the value of liquidity, we might well understand that those with the highest need for liquidity might have the largest response to a reduction in the cost of that liquidity. More specifically, if the subjective value of liquidity induced the portfolio adjustments which followed the Jobs and Growth Tax Relief Reconciliation Act of 2003, we might well expect to see that lower-income households valued liquidity more, and hence exhibited a larger behavioral response to the rate change. Empirical results based on regression analyses of the Survey of Consumer Finances between 1998 and 2010 support the hypothesis that investors, including those in low-income households, responded to the enactment of the dividend preference in a tax-efficient manner, increasing allocations to liquid accounts and away from tax-preferred retirement accounts.

Number of Pages in PDF File: 60

Keywords: tax rates, dividends, liquidity, retirement accounts, investment income, capital gains, savings behavior, portfolio allocation, efficiency, behavioral response, welfare, retirement, elasticity

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Date posted: August 15, 2013 ; Last revised: July 29, 2014

Suggested Citation

Chorvat, Elizabeth, Taxation and Liquidity: Evidence from Retirement Savings (September 2013). U of Chicago, Public Law Working Paper No. 444. Available at SSRN: http://ssrn.com/abstract=2309924 or http://dx.doi.org/10.2139/ssrn.2309924

Contact Information

Elizabeth Chorvat (Contact Author)
University of Illinois College of Business Department of Accountancy ( email )
1206 South Sixth Street
Champaign, IL 61820
United States
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