Tax Incentives for Household Saving and Borrowing

The paper reviews the literature on these tax incentives, with special focus on long-term saving, housing, and household liabilities. The paper addresses several areas of policy intervention: (1) the interest rate effect on personal saving; (2) the effect of tax incentives on long-term mandatory saving programs; (3) government programs that target saving for home purchase; (4) government programs that target health and saving for education; (5) the effect of tax incentives to borrow, rather than to save. For each of these five important issues, the paper provides empirical evidence on the main characteristics of government programs, with a special focus on middle-income countries. It also addresses a number of issues that should be of interest to policy-makers. First of all, on which grounds government policy should target some assets rather than others. Second, if taxsheltered assets and liabilities lead to substitution away from more heavily taxed savings instruments or if they affect the overall level of saving. And finally, if there is any lesson that can be drawn from the experience of developed countries for the design of saving and borrowing incentives in middle-income countries. * This paper is part of the World Bank research project on Taxation of Financial Intermediation. We thank Patrick Honohan, Alberto Matuzalem and seminar participants at the World Bank Conference of April 8-9, 2002, for useful comments and Tea Trumbic for research assistance. ** CSEF, Università di Salerno, and CEPR *** Stanford University, CEPR and SIEPR