The Impact of the 1986 Tax Reform Act on Personal Saving
Many critics believed that the Tax Reform Act of 1986 (TRA86) would
discourage saving. Yet personal saving rates have rebounded since 1987. This
rebound might have been caused by a general decline in marginal tax rates on
household saving. And we estimate, at least for the 1980s, a positive
elasticity of saving with respect to the after-tax rate of return. But the tax
changes alone cannot account for the recent upswing in saving rates.
Furthermore, the positive saving elasticity during the 1980s is fleeting and
fragile; during the entire postwar period the correlation between the after-tax
rate of return and personal saving is at most zero.
We also consider three alternative ways by which the Tax Reform Act could
have affected personal saving. First, the cutbacks in IRA eligibility were
viewed by some as discouraging saving. But conventionally measured personal
saving increased after IRA enrollment plummeted in 1987. We show that this
anomalous finding may be an artifact of how personal saving is measured, since
a different measure - - the real change in household wealth - . grew strongly
during the mid-l98Os, before leveling off after 1987. Second, the phasing out
of personal credit interest deductions in TRA86 could have discouraged
borrowing and thereby stimulated national saving. We find that wealthier
taxpayers simply shuffled their personal credit loans into tax-deductible
housing mortgages with little net effect on aggregate saving. Finally, saving
could have been reduced in 1986 if taxpayers, rushing to realize capital gains
before TRA86, spent their proceeds on bit-ticket consumption goods. We also
find little evidence in favor of this view, although we do find much of the
capital gains ended up in interest-bearing accounts. In sum, TRAB6 had more
impact on the composition than on the overall level of saving.
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