How do contribution limits affect contributions to tax-preferred savings accounts? |
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Authors: | Kevin Milligan |
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Affiliation: | a Department of Economics, University of Toronto, 150 St. George Street, Toronto, ON, Canada M5S 3G7 b Department of Economics, University of British Columbia, #997-1873 East Mall, Vancouver, BC, Canada V6T 1Z1 |
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Abstract: | Contributions to tax-preferred savings accounts are typically constrained by a contribution limit. These limits influence contributions not only for taxpayers currently constrained by the limit, but also for those contributing less than the limit. I develop a simple life-cycle model in which taxpayers exhibit ‘use it or lose it’ contribution behavior. This connects current contributions to future contribution limits, and implies that an increase in contribution limits can decrease contributions. Empirical evidence from microdata provides support for the model. Using variation from Canadian limit reforms I find that larger future contribution room is associated with smaller contributions. |
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Keywords: | Income tax Saving |
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