Do Savers Respond to Tax Incentives? The Case of Retirement Savings

Mardi | 2010-11-23

Clément CARBONNIER – Alexis DIRER – libre

This article exploits a large micro-file tax return data to test whether savers respond to the presence of tax incentives by contributing more in saving accounts that mandate annuitization at retirement. A frictionless model of demand for annuity is first set, which highlights the phenomenon of bunching of savers around tax thresholds when consumers’ budget set is kinked. Using French households income tax data, we do not find any bunching, which is consistent either with the absence of behavioral responsiveness to tax incentives or optimization frictions. We investigate the implications of the second hypothesis and propose an alternative test in which discontinuity in marginal rate of return on the two sides of tax thresholds is exploited. We find that the deduction scheme is effective in boostingthe demand for annuity of the richest savers whose marginal tax rate is the highest, especially for the oldest savers (aged 45 and above). In most cases, it fails to raise contributions of younger and less wealthy savers.