Treasury report

This is an executive summary of a Treasury report on Savings Incentive Options, Consultation and Analysis.

Thursday, January 24th 2002, 12:21PM

Following the Budget announcement regarding incentives for private savings, you instructed officials to consult with industry representatives to obtain their views. This report discusses the results of those consultations and officials’ analysis of options for increasing private savings.

This report focuses on three tax incentive designs, tTE, TET and TEt treatment. Officials’ view is that none of these schemes will be able to meet all of the objectives of a savings incentive. This is because of inherent contradictions between these goals. As a result, officials have endeavoured to outline these contradictions, along with the assumptions that guide them. Like nearly every analytical constraint, these can be resolved. The best way to proceed is for officials to receive guidance on which objectives are most important and which can be considered secondary. Such guidance would allow officials to move forward toward designing a savings incentive regime.

If Government did wish to proceed with tax incentives for private savings, the general consensus of those consulted is for a tTE system, implemented using rebates and subject to a cap on contributions. Consulted parties most broadly supported the incentive in a tTE regime because of the upfront nature of the incentive relative to a TEt or TET regime. These parties believe that an incentive would be most effective if it were immediate. Many felt that TEt or TET may be effective at increasing the level of savings for those who already save over the long term, but that in order to increase the number of new households saving, tTE would be more effective.

Officials too suggest a tTE scheme, but one that would include a cap on contributions much lower than consulted parties have likely envisioned (approximately $1000-$2000). Officials do not suggest that an upfront incentive is likely to make savings more realistic for many low to middle income households. Such an incentive scheme is simpler to promote and explain however, which may increase its utilization amongst households with little to no current savings. While no incentive may be likely to appreciably increase savings, Officials prefer a tTE scheme to a TET or TEt incentive because it would result in fewer harmful distortions to investment patterns, it would have a lower fiscal cost and it would create less room for avoidance and tax planning behaviour.

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This is an executive summary of a Treasury report on Savings Incentive Options, Consultation and Analysis.

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