9 research outputs found
Budgetary Costs of Tax Facilities for Pension Savings: An Empirical Analysis
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
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