Income and saving responses to tax incentives for private retirement savings
Many governments offer tax concessions for retirement contributions to boost retirement savings and alleviate the fiscal pressures of population aging. In this paper, we show that income responses are crucial for understanding these impacts. Using tax-register data, we study large changes in caps on tax-favored contributions to individual retirement accounts in Australia. We find that higher caps increase retirement contributions considerably, with around two-thirds of this response financed by increases in earned income. The gain in income tax revenue offsets the fiscal loss from higher tax-favored contributions, emphasizing the importance of taking income and labor supply responses into account.