Consumption Taxes, Income Taxes, and Saving: Evidence from OECD Countries
39 Pages Posted: 29 Aug 2011
Date Written: September 1, 2010
Abstract
We estimate the relative impact of consumption and income taxes on aggregate saving rates using panel data of OECD countries over 1975-2007. In a fixed-effects model and using tax rates and other key variables averaged in five-year intervals, we find that consumption taxation is generally neutral to private saving, while income taxation has a substantial negative impact on private saving. The implied aggregate compensated elasticity of private saving to the after-tax rate of return is approximately 1.3 when evaluated at sample means. The advantages of consumption over income taxation in stimulating private savings however are diminished with higher fiscal deficits.
Keywords: consumption taxes, income taxes, aggregate saving rate, OECD countries
JEL Classification: H20, H30, H60, E20
Suggested Citation: Suggested Citation
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