Revenue Effects of Tax Facilities for Pension Savings
Atlantic Economic Journal, Vol. 36, No. 2, pp. 233-246, 2008
Posted: 19 Jul 2009
Date Written: 2008
Many countries have tax facilities for pension savings. These facilities are often associated with the application of the cash-flow treatment of pensions: pension contributions are tax-exempt, capital income of pension funds is tax-exempt, and pension benefits are taxed, but usually at a relatively low rate. This paper investigates the revenue effects of a cash-flow tax regime for pension savings by full present-value calculations. A comprehensive income tax system is used as a benchmark. We present an empirical analysis for the Netherlands as a typical example of a country with funded pensions. Our calculations show that current taxation of pensions implies a major tax revenue loss. For the year 2003 we estimate a ‘fiscal subsidy’ of 1.4 to 1.5 percent of GDP.
Keywords: pension saving, tax treatment, tax revenue loss
JEL Classification: E62, H24, H55
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