On the effects of tax-deferred saving accounts

Abstract

This study investigates the quantitative impacts of tax-deferred saving accounts (TDAs) in a general equilibrium framework. These accounts implicitly provide consumption tax treatments on households’ retirement savings. In the U.S., the use of TDAs exhibits substantial heterogeneity: 401(k) has a much higher contribution limit than IRA, but only 50% of workers are eligibility for it. I developed an OLG model that captures the tax saving effects of TDAs and the heterogeneity in 401(k) eligibility in presence of nonlinear taxes. Results from this study show that providing universal 401(k) eligibility will increase the aggregate capital and the aggregate output are increased by 4.7% and 1.8% respectively. Also, the existence of TDAs substantially reduces the impacts of a flat tax reform. Compared to a model without TDAs, the increase in the aggregate output in the model with TDAs is lowered by 20.9%. JEL classification: H24, E21, E64.