TAX INCENTIVES FOR HOUSEHOLD SAVING AND BORROWING
Tullio Jappelli & Luigi Pistaferri
We thank Patrick Honohan, Alberto Musalem and seminar participants at the World Bank Conference of April 8-9, 2002, for useful comments and Tea Trumbic for research assistance.
Modern theories of intertemporal consumption choice emphasize that individuals may save for variety of motives: to smooth life-cycle fluctuations in income (the retirement, or life-cycle motive), to face emergencies arising from income or health risks (the precautionary motive), to purchase durable goods and housing, and to accumulate resources for one's heir (the bequest motive) (cf. Browning and Lusardi, 1996). Individual choice may be affected by the government policies that, in virtually all countries, target private saving. Government targeting is selective, and tends to affect not only the overall level of saving, but also the allocation of saving among its many different forms. Raising the overall level of saving is often viewed as an effective way to raise investment and growth. Many forms of government intervention thus aim at increasing saving tout court, but leave the ultimate decision about the allocation of saving to the individual. But in other cases government intervention mandates individuals to save in specific forms, or for specific purposes. For instance, in almost all countries governments promote retirement saving, because having insufficient resources during retirement entails a high burden not only for the elderly lacking these resources, but also for the society as a whole. Promoting saving for housing and other goods to which policy makers assign high priority (education, health, or life protection) is also a popular goal. The chapter reviews the literature on these tax incentives, with special focus on long-term saving, housing, and household liabilities. In very poor countries households rely on informal markets for credit transactions, so government intervention has a limited role in shaping household saving and portfolio allocations. The chapter therefore places special emphasis on the importance of tax incentives and saving instruments available in middle-income countries with relatively developed financial markets (as several Latin America and East-Asian countries). It is precisely in middle-income countries that mandatory saving instruments are more widespread, and often the only effective way of raising the overall level of saving and shaping household portfolios. In this area, the most developed countries have accumulated a wide experience in designing and implementing various tax incentives schemes. This experience can be used to evaluate the effectiveness of tax incentives and to draw lessons for middle-income countries.
A careful review of the international tax codes reveals that in most middle-income countries the tax system targets long-term, retirement saving instruments. This is hardly surprising given the role of retirement saving as the most important and widely available household financial asset. The tax features of pension funds are of special interest, given the recent wave of reforms of the social security system in Latin America and East Asia. Almost invariably, mandated contributions to pension funds are tax exempt, and very often voluntary contributions to longterm saving instruments are also heavily favored by the tax code. The chapter therefore concentrates mainly on mandated contributions to pension funds, although it devotes some space also to the tax treatment of other, more "sophisticated" assets, available in industrialized countries. The second area of widespread government intervention in middle-income countries is incentives to save for housing accumulation plans. These programs are absent in industrialized countries, but quite common in several middle-income countries. The chapter is divided in five parts, each addressing a particular saving instrument and area...