Caminada, Koen and Goudswaard, Kees (2005): Budgetary costs of tax facilities for pension savings: an empirical analysis. Published in: Department of Economics Research Memorandum No. 2005.03 (2005): pp. 1-17.
Download (655Kb) | Preview
A wide variety of tax regimes for (occupational) private pension saving are in place around the world. Generally, pension saving is taxed at a relatively low rate, although the revenue loss due to tax facilities for pension savings and/or pension tax expenditures may differ across countries. A strong fiscal stimulus to build up pension capital will support funding. However, these tax facilities may become an expensive business for governments. This paper investigates the ex ante budgetary effects of a cash-flow tax regime for pension savings by full present-value calculations. The fiscal subsidy on pension savings in several (European) countries is often associated with the application of the cash-flow treatment of pensions under the personal income tax: pension contributions are tax exempt, capital income of pension funds is tax-exempt, and pension benefits are taxed, but usually the elderly aged 65 years and over are taxed at a relatively low rate. This form can be described as EET, with E denoting an exemption or relief from tax and T denoting a point at which tax is payable. Indeed, tax treatment of pension saving can have other forms as well. We consider a specified form of a comprehensive income tax system (TTE) as an appropriate benchmark. Using the TTE-benchmark, the ex ante budgetary cost of the current tax treatment of pension saving in countries can be quantified. We employ an empirical analysis for the Netherlands, because this country belongs, with its three pension pillars and its sound funding, to the leading group of countries in Europe with a solid pension system. Our calculations, using Income Panel Data from Statistics Netherlands for the years 1990-2003, show that current taxation on a cash-flow basis means on balance a major loss to the Treasury (compared to the benchmark). For the year 2003 we estimate a fiscal subsidy associated with the current Dutch tax rule of 1.2 to 1.5 percent of GDP, depending on the assumed rate of return on pension capital.
|Item Type:||MPRA Paper|
|Original Title:||Budgetary costs of tax facilities for pension savings: an empirical analysis|
|Keywords:||pensions and annuities, tax treatment of pension savings, revenue loss to the Treasury|
|Subjects:||H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions
G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies
|Depositing User:||Koen Caminada|
|Date Deposited:||17. Feb 2010 07:03|
|Last Modified:||11. Feb 2013 17:25|
Antonin, A., A. de Serres and C. de la Maisonneuve (2004), ‘Long-term budgetary implications of tax-favoured retirement saving plans’, OECD Economic Studies, no.39, 2004/2, pp. 25-72.
Besseling, P.J., and A.L. Bovenberg (1998), ‘Fiscale behandeling van pensioenbesparingen in discussie’, CPB Working Paper 100, The Hague.
Boeschoten and D.M. Sluimers (2003), Zekerheden en consequenties: enkele berekeningen van pensioenmodellen in een ALM-omgeving downloadable via http://www.abp.nl).
Booth, P., and D. Cooper (2002), ‘The Tax Treatment of UK Defined Contributions Pension Schemes’, Fiscal Studies 23 (1), pp. 77-104.
Bovenberg, A.L. (2003), ‘Financing Retirement in the European Union’, International Tax and Public Finance, 10 (6), pp. 713-734.
Butare, T. (1998) 'Social Needs and the roles of governments and markets: The case of retirement pensions', International Social Security Review 51 (3), pp. 37-62.
Caminada, K., and K.P. Goudswaard (1996), ‘Progression and Revenue Effects of Income Tax Reform’, International Tax and Public Finance 3 (1), pp. 57-66.
Caminada, K. and K.P Goudswaard (2004), ‘The fiscal subsidy on pension savings in the Netherlands’, Tax Notes International, vol. 33 (13), 29 March 2004, pp. 1231-1240.
Commission and Council of the European Communities (2002), Joint report by the Commission and the Council with respect to Sufficient and Affordable Pensions, (COM 2002: 737 final), Brussels.
CPB Dutch Bureau of Policy Analysis (2000), C. van Ewijk, B. Kuipers, H. ter Rele, M. van de Ven, and E. Westerhout, Ageing in the Netherlands, The Hague: Sdu Publishers.
CPB Dutch Bureau of Policy Analysis (2003a), P. Kooiman, A. Nieuwenhuis, M. van de Ven, and F.W. Suiker, ‘Afschaffing fiscale faciliëring van prepensioensparen’, CPB Memorandum 76, The Hague.
CPB Dutch Bureau of Policy Analysis (2003b), Centraal Economisch Plan 2003(in Dutch), The Hague: Sdu Publishers.
CPB Dutch Bureau of Policy Analysis (2004), E. Westerhout, M. van der Ven, C. van Ewijk en N. Draper, ‘Naar een schokbestendig pensioenstelsel’ (in Dutch), CPB document 67, The Hague.
Ewijk, C. van, and M. van de Ven (2003), ‘Pension funds at risk’, CPB Report 03/1, 2003, pp. 22-27.
Gruber, J., and D.A. Wise (eds.)(1999), Social Security and Retirement around the World, The University of Chicago Press, Chicago.
Kari, S., and T. Lyytikäinen (2004), ‘A method to calculate the effective tax rate on pension savings with an application to Finnish tax reform’, paper presented at the 60th IIPF Congress, August 23-26st, Milan, Italy.
Ministry of Social Affairs and Employment (2000), De Nederlandse verzorgingsstaat. Sociaal beleid en economische prestaties in internationaal perspectief, The Hague: Sdu Publishers.
National Pension Debate Committee (2002), ‘Zorgen over morgen’, Report of the National Pension Debate Committee, The Hague: Association of Insurers.
OECD (1994), Taxation and Household Saving, Paris. Pensions & Insurance Board (2003), Key-figures pension funds 2001 (in Dutch: Kerntabellen pensioenfondsen 21 (downloadable via http://www.pvk.nl).
Sinn, H.W. (2005), ‘Europe’s demographic deficit. A plea for a child pension system’, De Economist 153 (1), pp. 1-45.
Statistics Netherlands (CBS), Data on personal income distribution 1990-2000 (CBS Income Panel Research) to be consulted on the website of the CBS (www.cbs.nl) via Statline, the electronic database of the CBS, Voorburg / Heerlen.
Wise, D.A. (2005), 'Facing the Age Wave and Economic Policy: Fixing Public Pension Systems with Healthcare in the Wings', Fiscal Studies 26 (1), pp. 5-34.
Yoo, K-Y., and A. de Serres (2004), ‘Tax treatment of private pension savings in OECD countries’, OECD Economic Studies, no.39, 2004/2, pp.73-110.