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"Back-Loaded" Tax Subsidies for Saving, Asset Location and Crowd-Out: Evidence from Tax-Free Savings Accounts

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  • Adam M. Lavecchia

Abstract

This paper presents estimates of the causal effect of Canadian Tax-Free Savings Accounts (TFSAs) balances on household saving and portfolio asset location choices. Contributions to TFSAs are not tax-deductible but capital income earned in the account accrues tax-free and withdrawals are not taxed. Using a difference-in-differences research design that exploits the sharp change in a family’s cumulative TFSA contribution room that arises when a family member turns 18 years old, I find that a 10 percent increase in TFSA balances reduces taxable financial asset holdings by 2.5 percent with no statistically significant effect on holdings in traditional tax-deferred accounts. I also find that the crowd-out in taxable asset holdings is driven by families reducing the share of their taxable financial assets held in fixed income securities

Suggested Citation

  • Adam M. Lavecchia, 2019. ""Back-Loaded" Tax Subsidies for Saving, Asset Location and Crowd-Out: Evidence from Tax-Free Savings Accounts," Department of Economics Working Papers 2019-04, McMaster University.
    • Handle: RePEc:mcm:deptwp:2019-04
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    References listed on IDEAS

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    Cited by:

    1. Derek Messacar, 2022. "Loss-Averse Tax Manipulation and Tax-Preferred Savings," Cahiers de recherche / Working Papers 8, Institut sur la retraite et l'épargne / Retirement and Savings Institute.
    2. Laurence O'Brien, 2024. "The effect of tax incentives on retirement saving," IFS Working Papers W24/45, Institute for Fiscal Studies.
    3. Laurence O'Brien, 2023. "The effect of tax incentives on private pension saving," IFS Working Papers W23/10, Institute for Fiscal Studies.

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    More about this item

    Keywords

    Tax-preferred savings accounts; back-loaded versus front-loaded subsidies; Tax-Free Savings Accounts; crowd-out;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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