Taxation and Saving

March 1999 In this survey, I summarize and evaluate the extant literature concerning taxation and personal saving. I describe the theoretical models that economists have used to depict saving decisions, and I explore the positive and normative implications of these models. The central positive question is whether and to what extent specific public policies raise or lower the rate of saving. The central normative question is whether and to what extent it is desirable to tax the economic returns to saving. I also examine empirical evidence on the saving effects of various tax policies. This evidence includes econometric studies of the generic relation between saving and the after-tax rate of return, as well as analyses of responses to the economic incentives that are imbedded in tax-deferred retirement accounts. Finally, I also discuss several indirect channels through which tax policy may affect household saving by altering the behavior of third parties, such as employers. (JEL Classification No. H20)