Revenue Effects of Tax Facilities for Pension Savings

Transcription

1 Source: K. Caminada and K. Goudswaard (2008), 'Revenue Effecs of Tax Faciliies for Pension Savins', Alanic Economic Journal 36 (2), pp Revenue Effecs of Tax Faciliies for Pension Savins Koen Caminada Economics Deparmen, Leiden Universiy P.O. Box 9520, 2300 RA, The eherlands phone: Kees Goudswaard Economics Deparmen, Leiden Universiy P.O. Box 9520, 2300 RA, The eherlands phone: Absrac Many counries have ax faciliies for pension savins. These faciliies are ofen associaed wih he applicaion of he cash-flow reamen of pensions: pension conribuions are ax-exemp, capial income of pension funds is ax-exemp, and pension benefis are axed, bu usually a a relaively low rae. This paper invesiaes he revenue effecs of a cash-flow ax reime for pension savins by full presen-value calculaions. A comprehensive income ax sysem is used as a benchmark. We presen an empirical analysis for he eherlands as a ypical example of a counry wih funded pensions. Our calculaions show ha curren axaion of pensions implies a major ax revenue loss. For he year 2003 we esimae a fiscal subsidy of 1.4 o 1.5 percen of GDP. JEL-classificaion: E62, H24, and H55 Keywords: pension savin, ax reamen, ax revenue loss Revised version of a paper presened a he 60 h Conress of he Inernaional Insiue of Public Finance, Milan, Ialy (Auus 23 rd - 26 h, 2004), and a he 60h Inernaional Alanic Economic Conference ew York, Unied Saes of America (Ocober 7 h, 2005). We hank Jenny Lihar, Henk Vordin, Guido Suurmond, Gerber Romijn, and he paricipans of our sessions of he IIPF Conress and he IAE Conference, and he referee of his journal for valuable commens on earlier drafs of his paper. The usual disclaimer applies.

2 Inroducion In many counries pensions are he subjec of rea ineres. Various sudies have reviewed he abiliy of he pension sysems o survive in view of he increasin ain of he populaion (Wise, 2005; Van Ewijk e al., 2006; Gruber & Wise, 1999). 1 In his conex, he financin of pensions is imporan. Funded (privae) pension sysems are enerally found o be less vulnerable o demoraphic shocks han public pay-as-you-o sysems. This is he reason underlyin recen pension reforms in for example Sweden and Germany (Sinn, 2005). These counries ry o parially swich o funded pensions. A number of oher counries already have subsanial funded pension prorams, such as he Unies Saes, Japan, he Unied Kindom, Denmark, and he eherlands. In many counries pension fundin is simulaed hrouh a favorable ax reamen of pension savins. A wide variey of ax reimes for occupaional privae pension savin are in place around he world. Generally, pension savin is axed a a relaively low rae, alhouh he revenue loss due o ax faciliies for pension savins and/or pension ax expendiures may differ across counries. A sron fiscal simulus o build up pension capial will suppor fundin. However, hese ax faciliies may become an expensive business for overnmens. This paper invesiaes he ex ane revenue effecs of a cash-flow ax reime for pension savins by full presen-value calculaions. To ha end, we use a specified form of a comprehensive income ax sysem as benchmark. We employ an empirical analysis for he eherlands, as a ypical example of a counry wih an exensive funded pension sysem. The paper is oranized as follows. The nex secion presens an overview of he ax reamen of pensions in OECD counries. We hen model he ex ane revenue implicaions of he various ax reamens of pension savins. We choose for a parial equilibrium approach, so behavioral effecs of implemenin he benchmark ax rule will no be aken ino accoun in our analysis. 2 For he empirical analysis we use Income Panel Daa from Saisics eherlands (2006) for he years We simulae he revenue effec associaed wih he Duch ax rule on pension savin for he period , which includes a major ax reform. In he final secion some conclusions are presened. Tax reamen of privae pensions in OECD counries The fiscal simulus of pension savin in several counries is associaed wih he applicaion of he cash-flow reamen of pensions under he personal income ax: pension conribuions are axexemp, capial income of pension funds is ax-exemp, and pension benefis are axed. This form can be described as EET, wih E denoin an exempion or relief from ax and T denoin a poin a which ax is payable. The ax reamen of pension savin can have oher forms as well. Conribuions can be exemped, while he wihdrawals and he accrual reurn on accumulaed funds are axed (ETT). Under a comprehensive income ax sysem (TTE) all income is axed when i is received, so savin is from axed income, ineres income from savins is axed, bu proceeds of savins do no suffer furher ax. Yoo & de Serres (2004) have presened an overview of he pracice of axaion of privae pension plans in OECD counries; see Table 1. 1 See for a deailed descripion of pension sysems in Europe he repor of he European Commission (2006). 2 An ineremporal compuable eneral equilibrium model wih overlappin eneraions could be used o ake ino accoun behavioral responses o chanes in ax reimes. For example, a less favorable ax reamen of pension savins may affec is size and herefore fuure ax revenues. I may also affec labor supply

3 Table 1 Tax reamen of privae pensions in 2003 a Conribuions b Fund Pension paymens c Ausralia d T pt T/PE Ausria d T (PE) E T/PE Belium d E (TC) E T/PE Canada E E T Czech Republic d (T (S) E T/PE Denmark E pt (15%) T Finland E E T France E E T/PE Germany E E T/PE Greece E E T Hunary d, e T E E Iceland E E T Ireland E E T/PE Ialy E pt (12.5%) T/PE Japan E E T/PE Korea E E T/PE Luxembour d E E T Mexico E E T/PE eherlands E E T ew Zealand d T T E orway E E T Poland E E T Porual d E (TC) E T/PE Slovak Republic E E T (15%) Spain E E T Sweden E pt (15%) T Swizerland E E T Turkey E E E Unied Kindom E E T Unied Saes E E T oe: E = exemp; T = axed under personal income ax; TC = ax credi; PE = parial exempion or deducion from axaion; S = sae subsidy; pt = parial axaion. a. Privae pension refers o mandaory or volunary funded privaely manaed pension schemes. b. Tax-deducible conribuions are subjec o a cerain limi in mos counries. c. This enerally concerns he ax reamen in he case of annuiies. Many counries allow pension benefis o be wihdrawn in he form of lump sums, in which case a parial exempion is raned so as o preserve ax neuraliy wih annuiies. d. The ax reamen of he employer s conribuion is differen from ha of he employee s. e. Mandaory conribuions are fully axed, bu volunary conribuions receive ax credis. Sources: Anolín e al. (2004, p. 29) and Yoo & de Serres (2004, p. 80) Twelve OECD counries (Canada, Finland, Greece, Iceland, Luxembour, he eherlands, orway, Poland, Spain, Swizerland, Unied Kindom and he Unied Saes) apply he EET- reime in which wihdrawals are subjec o he proressive income ax raes, alhouh ofen a preferenial raes. Anoher en counries (Ausria, Belium, France, Germany, Ireland, Japan, Korea, Mexico, Porual and he Slovak Republic) also apply an EET-reime, bu in hese counries wihdrawals are axed more lenienly han in he firs roup (for example hrouh parial ax free wihdrawal) or conribuions are raned a ax credi raher han a full deducion. In Ialy, Denmark and Sweden, axaion on conribuions is also deferred, bu accrued income from fund invesmen is axed, albei a preferenial raes (ETT). In Ausralia, Ausria, Czech Republic and ew Zealand conribuions are axed. ew Zealand comes close o a pure comprehensive income ax reime (TTE), while Ausralia is characerized as a TTT reime, bu conribuions can be parially exemped and invesmens earnins and benefis are axed a a preferenial rae

4 Revenue effecs under differen ax reimes In his secion we ry o ive an indicaion of he ex ane revenue implicaions of differen ax reamens of pension savins. 3 I should be noed ha heoreical lieraure does no poin a an appropriae ax sysem for pension savins. We use a specified form of a comprehensive income ax sysem (see below) as a benchmark (cf. Booh & Cooper, 2002). 4 The ax due will be defined when applyin he benchmark rule and when usin an alernaive ax rule EET. The srucural revenue effec can be calculaed in erms of ne presen value for applicaion of he EET-rule and of he benchmark rule. The difference beween he ax yield when usin he benchmark rule and when usin he EET-rule is called he fiscal subsidy associaed wih he EET-rule. The expendiure side of he pension scheme mus also be incorporaed ino he analysis. In he model described below we define for he differen ax reimes boh he presen value of fuure ax receips and he presen value of pension capial, which will be convered ino expendiure sreams. ex o his presen-value approach, a cash-flow approach could be used. In he laer approach, revenue effecs are measured as he ne amoun of revenues foreone on conribuions and accrued invesmen income and he revenues colleced on wihdrawals in he same year (correspondin o conribuions made in previous years). As Yoo & de Serres (2004, p. 81) arue, he presen-value approach has he advanae ha i is no influenced by he hisory of pas conribuions or by demoraphic chanes. Because his mehod akes ino accoun he ineremporal shif in ax revenues, i provides a more accurae picure of he budeary coss of ax-favored pension schemes. I should be menioned ha our model focuses on revenue effecs and does no include oher economic effecs or social efficiency consideraions. One of he purposes of favorable ax reamen of pension plans in many counries is o avoid moral hazard of workers, who may oherwise be emped o consume oo much of heir earnins durin work life and free ride on he social safey ne once hey reire (OECD, 2001, p. 30). 5 These advanaes need o be weihed carefully aains he fiscal revenue effecs of differen ax reamens of pension savin, bu also aains he risk of poor arein, as he ax relief may benefi roups who are no affeced by moral hazard and whose prospecive pension income is well above he social safey ne. This paper will no aemp o quanify such welfare effecs. The model Tax rule TTE (benchmark) We compare he revenue of a cash flow ax reamen of pension savins wih a specific comprehensive income ax, in which no relief is iven for he invesmen, and he proceeds of he invesmen are axed, bu pension benefis are exemp from ax. Pension benefis are based on he pension capial V which is accumulaed from ime =0 o =. In he benchmark case he pension savin invesmen before ax, C o, proceeds a rae r. Durin he accumulaion period he annual reurn on he invesmen is axed a rae τ. The accruin process of he value of he pension capial V (afer ax) can be wrien as: V = 0 C 0 V1 = C0 ( 1+ r) r τ C0 = C0 (1 V = V (1 (1) 2 1 V = C 0 (1 3 The analysis is limied o income ax; corporaion ax has no been aken ino accoun. 4 The Unied Kindom s Inland Revenue saes TTE as an appropriae benchmark for he calculaion of ax expendiures; see Booh & Cooper (2002, p. 84). 5 See Buare (1998) on he roles of overnmen and markes in he case of pensions, and on marke failure o jusify (ax) subsidies

5 So, he ne presen value of pension accumulaed under he benchmark ax rule amouns V TTE,0 (1 + r (1 = C0 where he discoun rae is denoed by δ., (2) In he benchmark case no ax relief is iven for he pension invesmen C 0 a ime =0; he pension savin invesmen C o is ou of disposable income (i.e. afer ax τ c ). We denoe he ax revenue under he benchmark rule in ne presen values a =0 as T TTE,0 C = c C0 + τ r = 1 (1 o τ (3) I should be noed ha we assume a fixed level of (ne) pension savin invesmen irrespecive of wheher he TTE-rule or EET-rule would be applied. In oher words, we calculae he ne ax coss per uni of conribuion. Behavioral effecs of implemenin anoher ax rule will no be aken ino accoun. As a resul, our model eneraes differen levels of ne pension capial and ne pension benefis when he TTE-rule and he EET-rule will be applied. 6 Alernaively, one could arue ha a model wih a fixed amoun of ne pension capial and ne pension benefis is more appropriae. However, in such a model i is overlooked ha an EET-ax code simulaes he build-up of pension capial, and is herefore likely o yield a hiher level of pension benefis. Tax rule EET The favorable ax reamen of pension savins in several counries is associaed wih he applicaion of he cash-flow reamen of pensions under he personal income ax. In his case no annual reurn ax is levied durin he accumulaion period (τ =0), so he pension capial accrues by rae r each period: V = (1+r) V -1. Pension capial will enerae he amoun available for benefis a =. The ne presen value of pension capial build-up under he cash-flow reamen of pensions under he personal income ax can be wrien as: V EET,0 (1 + r) = C0 (4) We denoe he ax revenue of he cash flow reamen of pensions under he personal income ax in ne presen values a =0 as T EET,0 (1 + r) = τ b C0 where τ b is he ax rae on pension benefis. (5) Fiscal subsidy on pension savins The pension capial build-up consiss of wo componens: he pension conribuion paymens and he capial rowh. When he benchmark rule applies, each of hese wo componens would be axed a he ime of he build-up. When he EET-rule is applied, he levy only akes place on he pension benefi paymens. So, he fiscal subsidy on pension savins in ne presen values can be denoed as S = TTTE,0 TEET,0 = τ c C0 + τ r = 1 C (1 0 (1 + r) b C0 (6) 6 Moreover, he esimaion of he revenue effec is resriced o direc axaion. I does no ake ino accoun ha indirec axes parially can offse he effecs of he sysem of direc axaion. Payin less direc axes increases spendin over he life cycle and herefore leads o hiher revenues from indirec axes

6 This means ha here can be several aspecs o he ax advanae of usin he EET-rule compared o he benchmark rule: (a) he difference beween he marinal ax raes on conribuions and wihdrawals due o rae proression, and because pensioners may be axed a preferenial raes (τ c and/or τ versus τ b ); (b) he effec of no collecin any annual reurn ax on pension capial durin he build-up period, in combinaion wih he laer momen in ime of he ax paymen. These parial effecs of he fiscal advanae of usin ax rule EET can be disenanled as follows. In principle, here is no ain from deferral if δ = r and he capial ax τ is zero. We herefore disinuish he effecs of he posiive capial ax on he one hand (holdin τ c and τ b equal) and he differenial reamen of youn and old people, if any, on he oher hand (holdin τ a zero). The parial effec of low senior ax raes, S(a), can be calculaed as: S (1 + r) ( a) = τ c C0 b C0 (7) The parial effec of deferral ax paymen, S(b), is he combined effec of no collecin any annual reurn ax on pension capial, and he laer momen in ime of he ax paymen. This parial effec, S(b), inores rae proression, i.e. we calculae he fiscal subsidy for τ > 0. C S( b) = r = 1 (1 0 τ (8) The no-fiscal subsidy case A fiscal subsidy of he EET-scheme, if any, leads o a lower effecive ax burden compared o a comprehensive income ax sysem (cf. OECD, 1994). Governmens may conclude ha fiscal suppor of pension savins has become an expensive business. Obviously, also under he EET-rule i is possible o raise ax raes o reduce he fiscal subsidy on pension savins. We calculae he level of he ax rae under he EET-rule ha would enerae exacly he same amoun of ax revenue compared o he benchmark rule. We denoe his equivalen ax revenue yieldin rae on pension benefis as τ b *. The fiscal subsidy would disappear for: (1 + r (1 S = 0 TTTE,0 TEET,0 = 0 b* = τ c + τ r = 1 (1 + δ ) (1 + r) τ (9) The level of he equivalen pension benefi ax rae depends on he level of he ax raes of he benchmark case, on he level of he annual invesmen reurn rae r, and on he pension capial build-up period. 7 oe ha he equivalen pension benefi ax rae will enerally be (sinificanly) hiher han he ax raes in he benchmark case. A numerical applicaion for he eherlands Duch pensions From he OECD counries, he eherlands has he hihes relaive amoun of asses in ax-favored reiremen savin plans: oal asses represen more han 110 percen of GDP (Anolín e al., 2004, p. 30). In addiion, paricipaion in (mandaory) privae pension plans and he share of hese plans in oal reiremen income are hih. More han 90 percen of he employees have, on aainin he - 5 -

7 ae of 65, supplemenary pension insurance in addiion o he basic fla rae public pension for all residens (OAP). Therefore, i can be expeced ha he ax reamen of hese supplemenary pensions has a relaively hih sinificance in erms of ne fiscal revenues. We analyze he case of he eherlands as a ypical example of an EET-reime (Bovenber, 2003). However, i is no a pure EET-reime, because wihdrawals are axed a a lower rae, because pension benefi recipiens over 65 years of ae do no pay any conribuions o he basic public old ae pension scheme. In addiion, marinal income ax raes on wihdrawals are ofen lower han marinal raes on conribuions because of rae proression. Assumpions We will simulae he revenue effecs of he Duch ax reamen of pension savins. The basis of he simulaion is he amoun of Duch pension conribuions which were deduced in he year 2000 (14.9 billion euros, or 3.7 percen of GDP). A number of assumpions have o be made. The pension conribuions enered ino in 2000 maure for an unknown number of years unil hey pay ou as benefis. We esimaed a weihed averae duraion of capial build-up of around 15 years. 8 The simulaions have also been carried ou wih duraions of 10 and 20 years. We use a discoun rae of 3 percen, close o he real ineres rae on Duch overnmen deb. This discoun rae is also used in pension sudies by he European Union (Economic Policy Commiee, 2006). In a second simulaion we use a hiher discoun rae of 5 percen. Also, we have se he rae of reurn on pension capial equal o he discoun rae. This mehodoloy avoids ha risk premiums are reaed in an asymmeric manner and is in line wih curren inernaional convenions (cf. Van Ewijk e al., 2006). We assume for he sake of simpliciy ha he accumulaed capial will be paid ou from he ae of 65. The averae ae of deah is 77, so he averae number of years durin which he pension capial is paid ou as benefis is assumed o be 12. In order o esimae he relevan ax raes, we used Income Panel Daa from Saisics eherlands (2006) which conain exensive informaion on he disribuion of axable income across income roups. This makes i possible o classify axpayers by ax brackes. Pensioners of 65 years and older have 70 percen of heir income in he firs or second ax bracke, 20 percen in he hird ax bracke and he remainder in he hihes ax bracke. This ives a weihed seniors ax rae (τ b ) of abou 25.5 percen on supplemenary pension. ex, we esimaed he ax rae o be applied o he pension conribuions (τ c ), which are ax-deduced under he EET-rule and paid ou of afer ax income in he benchmark case. We find a weihed effecive ax rae for he year 2000 of 44 percen. 9 Durin he accumulaion period he annual reurn will be axed a he same rae under he benchmark rule, so τ c = τ = 44 percen. Resuls We calculae he presen value of axes paid and of pension capial (pension expendiure) under he Duch ax rule and under he benchmark rule. o accoun is aken of he possible behavioral effecs of implemenin he benchmark rule. The difference beween he ax yield when usin he benchmark rule and when usin he Duch ax rule is called he fiscal subsidy associaed wih he Duch ax rule. Table 2 shows he resuls of a number of simulaions, includin a sensiiviy analysis. (1 + r (1 7 oe ha for r = δ τ b* = τ c + τ r (1 δ = 1 + ) 8 This esimaion is confirmed by CPB eherlands Bureau of Economic Policy Analysis (no published). The relaive low duraion (below half of he maximum ime period people could build up heir pension) can parly be explained by he hih relaive weih of pension conribuions of older workers wih on averae hih incomes. 9 Accoun has been aken in hese calculaions of he so-called hreshold effec: ax payers may o ino a lower ax bracke because of he use of he ax deducion. On his see Caminada & Goudswaard (1996)

8 Table 2 Effecs of differen ax reamens of pension savin x billion euros in PV Rae of reurn 5% (discoun rae 5%) Rae of reurn 3% (discoun rae 3%) benchmark Duch difference benchmark Duch difference ax rule ax rule ax rule ax rule TTE (1) EET (2) (1)-(2) TTE (1) EET (2) (1)-(2) Period of pension capial rowh: 20 years Tax revenue Fiscal subsidy curren ax rule (-) parial effec low senior ax rae (-) parial effec deferral ax paymen Accumulaed capial (pension expendiure) Period of pension capial rowh: 15 years Tax revenue Fiscal subsidy curren ax rule (-) parial effec low senior ax rae (-) parial effec deferral ax paymen Accumulaed capial (pension expendiure) Period of pension capial rowh: 10 years Tax revenue Fiscal subsidy curren ax rule (-) parial effec low senior ax rae (-) parial effec deferral ax paymen Accumulaed capial (pension expendiure) Explanaory noe: C 0=14.9 billion euro; τ c=44.0 percen, τ =44.0 percen; τ b=25.5 percen; n=10, 15, or 20 years; r=3 or 5 percen, and δ = 3 respecively 5 percen. All amouns are x billion euros. Euros in ne presen value (PV) so ha he amouns relain o he various differen years have been made comparable; a discoun rae of 3 percen has been used. Source: own calculaions; all daa and simulaion resuls are available upon reques. Invesmen reurn and discoun rae A an annual rae of reurn on he pension capial of 3 percen and a discoun rae of 3 percen he ax acually paid - in erms of ne presen value and measured over a period of 15 years - is 3.8 billion euros, compared o 9.2 euros in he benchmark case. The acual ax paid herefore amouns o only 41 percen of wha would be owed if he benchmark rule were o be applied. In oher words, applicaion of he Duch ax rule for pensions ives a fiscal subsidy of 5.4 billion euros. A a hiher rae of reurn on invesmen (5 percen) he fiscal subsidy increases o 6.8 billion euros. We performed our simulaions wih several oher discoun raes. I appears ha he resul is no very sensiive o he discoun rae used. The fiscal subsidy repored in Table 2 increases by 0.5 o 0.9 billion euros per poin hiher discoun rae, dependin on he lenh of he build-up period

9 Duraion We also simulaed duraions of capial build-up of 10 and 20 years. Measured over a en year period, he Duch ax rule 'only' ives a subsidy of 4.6 billion euros (in erms of ne presen value, a a rae of reurn of 3 percen). A doublin of he duraion from 10 o 20 years eneraes a subsanially hiher subsidy of 6.2 billion euros due o he addiional capial rowh. This capial rowh remains unaxed durin he build-up period of he pension capial under he EET-reime. In addiion, he hiher annual pension benefi paymens arisin from his will only be axed a a relaively low seniors rae. In oher words, he fiscal subsidy on pension savins increases when pension schemes have a loner duraion before hey sar o pay ou pension benefis. Parial effecs The relaively low ax rae for seniors and he deferral of ax paymen oeher enerae he fiscal advanae associaed wih he Duch ax rule. In he case of a 5 percen rae of reurn and a period of pension capial rowh of 10 years, he parial effec of he deferral of ax paymen is abou equal o he effec of he lower senior rae. The share of he deferral of ax paymen in he oal fiscal subsidy increases when pension schemes have a loner duraion before hey sar o pay ou pension benefis. Pension capial The simulaions show ha he presen value of accumulaed pension capial (and hus of pension expendiure) is hiher under he Duch ax code han under he benchmark ax code. 10 The difference is larer a a loner build-up period and a hiher invesmen reurn. This resul, of course, depends on our assumpion of consan conribuions in he wo reimes. everheless, i can be concluded ha he Duch ax code favors he build-up of pension capial, and herefore he level of pension benefis. Time-series analysis Fiscal subsidy The calculaions for he year 2000 show ha he Duch ax rule implies a revenue loss o he Treasury compared o he benchmark. Srucurally, he fiscal subsidy on pension savins a a rae of reurn on he pension capial of 3 percen and a duraion of 15 years comes o abou 5.4 billion euros (1.34 percen GDP) in ne presen value erms. 11 Fiure 1 shows he esimaes for all he years in he period calculaed in he same way as explained above for he year The fiscal subsidy rises durin his period by 38 percen due o hiher pension conribuions. In he case of a 3 percen yield, he fiscal subsidy rises from 0.97 o 1.34 percen of GDP; if a yield of 5 percen is used, he fiscal subsidy rises from 1.22 percen in 1990 o 1.69 percen of GDP in Esimaes fiscal subsidy for The analysis so far refers o he siuaion for he year Under he new Income Tax Ac 2001 accumulaion of capial if he benchmark rule would be applied should be axed a a lower rae 10 oe ha he amoun of pension capial as build-up in years will always be less under he benchmark ax rule where a ax rae is levied on he proceeds of he invesmens (τ >0). (1 (1 ) + r VTTE, 0 VEET,0 = C0 so VTTE,0 < VEET,0 for τ > 0 11 Yoo & de Serres (2004) also esimaed he ne ax cos of pension savins in he eherlands, usin he presen-value approach. They find ha overall cos arisin from conribuions made in 2000, are almos 1.2 percen of GDP (p. 94), which resul is very similar o ours. 12 The amoun of fiscal subsidy we find for recen years is lower han in previous work (Caminada and Goudswaard, 2004) due o several more realisic assumpions made and due o improved daa

10 han was he case in he year Also, he oher relevan ax raes have been reduced. A special feaure in he new leislaion is a 30 percen ax o be levied on income from ne asses, based on he assumpion ha a axable rae of reurn of 4 percen is made on ne asses, irrespecive of he acual reurns. Thus, under he benchmark rule a 1.2 percen ax should be levied on he accumulaed pension savins, irrespecive of he acual reurns. Addiional reurns above 4 percen are no axed. Fiure 1 shows he esimaes of he fiscal subsidy for he period under he new ax reime. The (one-ime) effec of lower raes under he Income Tax 2001 diminished he fiscal subsidy on pension savins, bu his is counerbalanced by he effec of he sharp increase of he conribuion inpu for pensions in recen years. 13 In he year 2003, he fiscal subsidy on pension savins under he curren Duch ax rule amouns o 7.0 billion euros (1.49 percen GDP). A an annual invesmen reurn rae of 5 percen, he subsidy declines o 6.8 billion euros (1.45 percen of GDP). oe ha due o he ax reform annual raes of reurn on ne asses above 4 percen are no axed if he benchmark is applied; his explains he remarkable drop of he fiscal subsidy in he year 2001, in case a rae of reurn of 5 percen is simulaed. See Fiure 1. Fiure 1 Fiscal subsidy associaed wih Duch ax rule as percenae of GDP, ,0% 1,5% 1,0% r=5% 0,5% r=3% 0,0% Source: own calculaions (build-up period 15 years) The no-fiscal subsidy case We have calculaed he ax rae on pension benefis under he Duch ax rule (τ b *) ha would enerae exacly he same amoun of ax revenue as under he benchmark rule. When his ax rae would be applied, he fiscal subsidy on pension savin would disappear. Table 3 shows he simulaion resuls boh before and afer he ax reform The equivalen pension benefi ax rae is sinificanly hiher han he acual rae (see equaion 9; τ b = 25.5 percen). The new Income Tax Ac 2001 reduced he fiscal subsidy on pension savins, and has herefore also reduced he equivalen ax rae on pension benefis. In our simulaions we find a drop in he equivalen ax rae on pension benefis varyin from 4 o 17 percenae poins, mainly dependin on he invesmen yield used. 13 The pension invesmen rose from 3.7 percen of GDP in 2000 o an esimaed 4.7 percen in

11 Table 3 Equivalen ax rae on pension benefis Rae of reurn 5% (discoun rae 5%) Rae of reurn 3% (discoun rae 3%) benchmark ax rae TTE acual ax rae EET equivalen ax rae EET benchmark ax rae TTE acual ax rae EET equivalen ax rae EET τ c τ τ b τ b* τ c τ τ b τ b* panel (a): year 2000 Duraion 20 years: ax raes Duraion 15 years: ax raes Duraion 10 years: ax raes panel (b): year 2001 Duraion 20 years: ax raes Duraion 15 years: ax raes Duraion 10 years: ax raes Source: own calculaions Conclusion Several OECD counries use ax incenives o encourae privae pension savins. These incenives may imply lower ax revenue for he Treasury. This paper invesiaes he ex ane revenue effecs of a cash-flow ax reime for pension savins by full presen-value calculaions. We used a specified form of a comprehensive income ax sysem (TTE) as a benchmark. Compared o he comprehensive income ax, he cash-flow ax reime implies lower ax revenue, because ax paymens are deferred and reurns on accumulaed funds are exemped, and because wihdrawals are enerally subjec o lower marinal ax raes han pension conribuions. Wih our model he ex ane revenue effec of he curren ax reamen of pension savin in counries can be quanified. We performed an empirical analysis for he eherlands as a ypical example of a counry wih sinifican ax-favored privae reiremen savin schemes. Our simulaions, usin Income Panel Daa, show ha he Duch ax rule i.e. axaion on a cash-flow basis - means on balance lower revenue for he Treasury, compared o a specific form of a comprehensive income ax. A a real rae of reurn on he pension capial of 3 percen and a build-up period of 15 years, he fiscal subsidy in erms of ne presen value comes o 1.3 percen of he GDP for he year A a rae of reurn of 5 percen, he fiscal subsidy on pension savin rises o 1.7 percen of GDP. The new Income Tax Ac 2001 reduced he amoun of he fiscal subsidy on pension savin due o he lower relevan ax raes, bu he amoun of conribuions has risen sharply since he year For he year 2003, we esimae a fiscal subsidy of 1.4 o 1.5 percen of GDP. To presen his resul in anoher way: when he curren ax rule is mainained, he ax raes on pension benefis should rouhly be doubled o fade away he curren fiscal subsidy on pension savins in he eherlands. The loss of ax revenue due o he favorable ax reamen of pension plans in he eherlands will probably increase in he near fuure, because of increasin pension conribuions. The ax subsidy on pensions is one of he lares ax expendiures which herefore should be jusified. This does no necessarily imply ha his ax expendiure should be abolished. Our model and maerial presened are enaive and do no ive any answer on he quesion wheher sociey would be beer off in case alernaive ax codes on pension savin would be applied. This would require boh a comprehensive economic analysis as social efficiency consideraions which are beyond he scope of his paper

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