Tax Incentives and Economic Growth

By Barry P. Bosworth | Go to book overview

Some of this difference can be explained by the difficulties, discussed earlier, of measuring interest income in an inflationary environment.51 If comparable adjustments are made for both countries, however, a growing divergence is evident after 1975 that cannot be attributed to income growth or inflation. Instead, several investigators have pointed out that in Canada: (a) consumer interest payments are not deductible from taxable income, (b) there have been more substantial exclusions from taxation of income placed in special saving accounts, and (c) interest rates for small savers are not constrained by regulations as severely as in the United States.

On the other hand, a study by Jump has argued that the Canadian tax treatment of saving accounts will influence the composition rather than the total amount of saving, and that Canadian studies have not normally found significant interest rate effects on consumer spending.52 He points out that most of the tax benefits can be achieved by shifting existing wealth into the tax-exempt deposit accounts rather than through an increase in the saving rate. It would appear, however, that this option would be exhausted after a few years; the financial wealth of most savers is equal to only a few years of such saving. The question of whether individuals would continue to pay into these accounts over long periods remains. In effect, after adjusting for inflation, Jump concludes that the divergence of household saving rates between Canada and the United States is due to a decline in household saving in the United States rather than a rise within Canada. The decline within the United States may be due to reductions in corporate taxes that shifted the pattern of private saving.


Summary

If the United States is to achieve a higher rate of capital formation at sustained levels of full employment, it will be necessary to increase the nation's rate of saving. Government can achieve that goal directly by increasing its own saving through budget surpluses, or it can seek to

____________________
51
Jump, "Recent Behavior of the Personal Saving Rate."
52
Gregory V. Jump, "Tax Incentives to Promote Personal Saving: Recent Canadian Experience," Saving and Government Policy, conference series no. 25 ( Federal Reserve Bank of Boston, 1982), pp. 46-64. See also the subsequent discussion as a criticism of his view.

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