Consumption Taxes, Income Taxes, and Saving: Evidence from OECD Countries

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.