Tax policy,regulated interest rates,and saving

The paper evaluates tax policy options designed to reduce distortions to savings behavior that occur when administered interest rates are set beneath market equilibrium levels. While the removal of controls on interest rates might be the best option, political, legal or institutional circumstances might well preclude this solution. It suggests that consumption (or sales) taxes can be designed so that, in the short term, the rate of return to saving can be changed to approximate the market-determined interest rate. The main advantage of the measure is that it can provide (a) time to develop appropriate legal and institutional structures for financial deregulation, and (b) an additional policy instrument that allows the burden of adjustment, in a stabilization policy setting, to be distributed over more than one instrument.