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Taxpayer Participation under the Registered Retirement Savings Program
Published online by Cambridge University Press: 07 November 2014
Extract
The Registered Retirement Savings Plan, adopted in 1957, afforded Canadian taxpayers a new deduction from assessable income under the individual income tax. Qualified participants in this program may reduce current tax liabilities by their contributions to personal retirement savings accounts. This tax-inducement scheme was somewhat unusual, and “representative” taxpayer response would therefore occur only after a time lapse for individual evaluation of program advantages. Sufficient time has now expired, however, to permit a study of program performance.
Taxpayer response should be judged by reference to program objectives. Parliamentary discussions indicate that the measure had two objectives. The first was to restore an element of fairness, or uniform treatment, to the taxation of retirement funds. The second was to reinforce the social policy of fostering retirement saving in the private sector. The particular construction of the retirement saving scheme and the consequent taxpaper response seem, however, to have led to a failure to achieve either objective.
Taxpayer participation in 1962 is analysed in this article. Registered retirement savings deductions in that year were declared on only 1.49 per cent of all taxable returns filed by individuals under 65 years of age. Few taxpayers, then, utilize this deduction, and those who do are concentrated in the higher income classes.
La participation du contribuable au programme d’epargne-retraite sous l’empire de la loi de l’impot sur le revenu
Cet article examine l'efficacité des stimulants fiscaux pour accroître l'épargne personnelle en vue de la retraite. Le programme particulier qui est examiné est celui de l'amendement adopté en 1957 à la Loi de l'Impôt sur le revenu. Les contribuables canadiens peuvent diminuer leurs obligations fiscales courantes en déduisant de leur revenu imposable une épargne-retraite admissible. L'éligibilité du contribuable à ce programme étant presque universelle, l'étude des stimulants fiscaux en devient utile.
Il s'agit ici d'un programme à impôt différé. On soulève la question des avantages fiscaux nets qui résultent de la participation. Mais pour cela, on a besoin de grandeurs relatives à l'avenir. L'attention se porte donc plutôt aux réductions immédiates (annuelles) du fardeau fiscal. On estime que ce stimulant fiscal consiste dans le produit (a) du taux de la subvention gouvernementale à la caisse de retraite et (b) de la base relative des contributions à partir de laquelle le fardeau fiscal est réduit. Le processus par lequel on détermine la réduction de l'impôt et les limites aux contributions permises sont les deux moyens discrétionnaires qui permettent de modifier l'importance relative du stimulant fiscal.
Des statistiques sont présentées sous une forme résumée sur la participation des contribuables pour l'année 1962. Cette participation augmente jusqu'à la classe de $25,000 de revenu imposable et diminue au-delà. On calcule un coefficient de stimulation fiscale pour chacune de cinquante-huit classes de revenu. Des tests permettent de penser que l’incitation fiscale, telle que définie, est significative statistiquement pour l'explication des variations relatives selon les classes de revenu dans la participation des contribuables. Des plans différents d'incitation peuvent par conséquent être proposés. Cette conclusion justifie la poursuite des études sur les stimulants relatifs à l'impôt sur le revenu personnel en vue d'accroître l'épargne pour la retraite.
- Type
- Research Article
- Information
- Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 32 , Issue 2 , May 1966 , pp. 220 - 229
- Copyright
- Copyright © Canadian Political Science Association 1966
References
1 Stat. Can. 1957, 168. c. 29.
2 The Act to amend the Income Tax Act and subsequent amendments specify constraints on the nature of investment, early withdrawals, etc. I review only the major provisions, although all limitations to the program have some bearing on participation.
3 Taxpayer participation data, therefore, are not deflated by the standard deduction, in the sense that some taxpayers with allowable contributions alternatively choose the standard deduction.
4 The original limits in the Registered Retirement Savings Plan permitted a maximum deduction of the lesser of $1,500 or 10 per cent of earned income for pension plan participants, without consideration of employer pension contributions. Stat. Can. 1957, 168. Income Tax Act. S. 79(B) (5) (a). This treatment was amended in Stat. Can. 1959, 283, at 294. c. 45.
5 The success in fostering personal saving for retirement is measured both by the breadth of taxpayer participation and the corresponding amounts of induced saving. To the extent that taxpayers are “target” retirement savers, for example, the Registered Retirement Savings program will be ineffective in inducing a higher propensity to save.
6 The taxpayer is assumed to consider participation on an annual decision basis, as the statute does not require saving contracts. The use of immediate reductions in tax liabilities to reflect ultimate net tax relief also presupposes that the age distribution of taxpayers among income classes does not significantly distort this relationship.
7 It has alternatively been suggested that the relative contribution ceiling is important because the opportunity cost of changing one's portfolio (to include this program) increases with income. I prefer to concentrate on the relative values of the specific tax concessions. In either case, one must relate the contribution ceilings to respective levels of individual income.
8 This assumes utility to diminish in an inverse ratio to means. The effect on the relative incentive to participate, S*/Ȳ, is to say that a $20 refund to a person with $5,000 of income will have the same incentive as a $200 refund to a taxpayer with $50,000 of income.
9 These data on taxpayer registration and participation are from accounts of the Department of National Revenue, Taxation Division. I express my appreciation to members of this Department for making this information available, subject to the policies regarding the disclosure of taxpayers' identity.
10 Dominion Bureau of Statistics, Pension Plans; Non-Financial Statistics, 1960 (Ottawa, 1962), 12–15.Google Scholar
11 The 1962 median assessable income of Canadian taxpayers under age 65 is in the $4,000–$4,099 income class.
12 The median income for financial business proprietors is in the $10,000–$14,999 income bracket, while occupation mean income is $18,810. Likewise, the median income for real estate operators is within the $5,000–5,999 bracket, and mean income is $9,106. Department of National Revenue, Taxation Statistics, 1964, Table 10, p. 86.
13 The amounts of participant deductions also must be evaluated as an element of program performance. The non-availability of individual participant saving data, however, prevents such a study. The alternative use of income class average participant deductions would ignore the dispersion within classes.
14 Avefage exemptions and deductions—other than retirement savings premiums—were subtracted from mean assessable income to arrive at average taxable income for each income class. The federal tax payable was calculated. Next, the maximum allowable retirement savings premium for a non-pension participant was determined and deducted from the above taxable income, to realize a new reduced basis for taxation. The recalculated tax liability was subtracted from the original taxes payable to find the maximum immediate tax saving, S*.
15 Earned income is a declining percentage of total assessable jncome as the latter increases. The retirement contribution is based on earned income. R i */Ȳ i as actually estimated there-fore is not constant until the contribution ceiling is reached. The rate of change is incidental, however, and the generalization can stand.
16 At first appearance, there may seem to be a high correlation between assessable income (Y) and the relative incentive to participate (α). The actual calculation of taxable income, restrictions on allowable contributions, and the rates of change in incremental tax rates all, however distort relationships between paired values of Y and α (r 34, = .24).
17 The ratio of actual participants to taxable returns by individuals under 65 years, P i/n i , is raised by the factor 100 in the calculations; e.g. 12.345 (per cent).