Should the Government Be Paying Investment Fees on $3 Trillion of Tax-Deferred Retirement Assets?
60 Pages Posted: 2 Oct 2017 Last revised: 21 Jan 2020
Date Written: January 12, 2020
Under standard assumptions, both individuals and the government are indifferent between traditional tax-deferred retirement accounts and “front-loaded” (Roth) accounts. When we add investment fees to this benchmark, individuals are still indifferent but the government is not. We estimate that tax deferral increases demand for asset management services by $3 trillion, causing the government to pay $20.7 billion in corresponding annual fees. In a general equilibrium model with asset management services as differentiated products, we examine the incidence and welfare implications of the added demand. Tax deferral in our model produces a larger asset management industry, higher taxes, and lower social welfare.
Keywords: Mutual Fund Fees, Taxes, Retirement Savings
JEL Classification: D14, G11, G23, G28, G51, H21, J26, J32
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