The Effect of Tax-Based Savings Incentives on Government Revenue

There is an unresolved debate on the effect of tax-based savings incentives on government revenue. The conventional wisdom on tax-assisted saving plans (TASPs) holds that they reduce public savings, but may raise national savings by stimulating private savings. Feldstein (1995) has challenged the view that TASPs reduce government revenue. According to Feldstein, ‘some of the increase in personal saving raises the corporate capital stock, and the return on this additional capital raises corporate tax payments’. When the additional corporate income tax revenue is taken into account, ‘the revenue loss associated with IRAs [Individual Retirement Accounts] either is much smaller than has generally been estimated or is actually a revenue gain’. This paper extends Feldstein's analysis to incorporate international considerations, differences in tax structures and alternative values for key parameters. We show that the result presented by Feldstein represents a special case that does not lead to broad generalisations. We also show that, under most conditions, the tenets of conventional wisdom that TASPs reduce government revenue are likely to hold, but that the magnitude of the effect may not be large. Finally, we suggest that the focus of research on the savings effects of TASPs is justifiable in a closed economy, where domestic savings affect domestic investment, but is not useful for policy development in small open economies. JEL classification: H2, H3, H6.     

Temporal Patterns in Foreign Exchange Returns and Options

Although the foreign exchange market is believed to be one of the most efficient financial markets in the world, there is significant evidence that technical analysis is profitable in this market. In this study we investigate the ability of information from the options market to supplement the commonly used information on past prices to predict temporal patterns in foreign exchange returns. We find that strategies using information from at-the-money options were more consistently profitable than the commonly used strategies based on only historical spot exchange rates (past prices). Consequently, options appear to contain information regarding future spot exchange rate movements.