The Tax-Deferred Saving Plan And Private Savings In An OG Model With Production

Abstract

This paper focuses on the effects of the tax-deferred saving plan on total private saving. The model is an extension of the one in Ragan (1994) to incorporate production and varying factor prices. I take RRSPs as an example of the tax-deferred saving plan in the model. Two different tax systems are considered in analysis: the flat rate tax system and the progressive tax system. Under each tax system, the results in the case without RRSPs are compared with the results in the case with RRSPs. The simulated steady state results show that RRSPs increase the private saving rate under both flat rate and progressive tax system, which is different from the results in Ragan (1994). Also, RRSPs contribution accounts for a large portion of total saving due to the high tax rate. The optimal RRSPs contribution decreases as the tax distortion declines in the model. The sensitivity analysis of the benchmark with respect to the changes in the parameters is also included.