The After Tax Rate of Return Affects Private Savings

Abstract

This paper reviews theoretical argurrents and empirical evidence regarding the interest elasticity of savings.It concludes that there are strong theoretical reasons to expect an increase in after tax rates of return to increase private savings.Moreover, the empirical rrethods used in imst previous studies are likely to produce underestimates of the interest elasticity of savings.New evidence based on direct estimation of utility function paraneters suggests that savings are likely to be highly interest elastic.The paper concludes by noting that too little tirre has passed to evaluate the effects of the savings incentives contained in recent tax legislation.

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