Savings Rates and Tax Structure
Nancy J. Burnett, UW – Oshkosh
Lee Van Scyoc, UW – Oshkosh
US Net National Savings
Savings Rates and Tax Structure
• Literature: From the classics of Friedman and
Modigliani to “9-9-9”
– Agreement on importance of personal savings
– Theoretical analysis of consumption v. income tax
– Empirical evidence mixed
• International studies
• Time series studies
• Suffer from cross cultural and/or changing environment
State by State Analysis
• Eliminate the environment differences
• Eliminate (mostly) the cultural differences
• State residents all have access to the same R
and pay the same Federal Tax
• State have different tax regimes
– Sources of state income
Sources of Revenue, Selected Areas
State
Property
General Sales
Individual
Income
Corporate
Income
Other Taxes (a)
U.S.
30.8%
22.9%
22.9%
4.3%
19.1%
Calif.
28.4%
22.1%
30.0%
6.4%
13.2%
Del.
16.3%
0.0%
28.7%
8.3%
46.7%
Fla.
41.3%
31.2%
0.0%
3.0%
24.6%
Ill.
36.8%
16.1%
17.8%
5.4%
23.9%
Mont.
34.1%
0.0%
25.2%
4.7%
36.0%
Nebr.
33.1%
25.0%
23.0%
3.1%
15.8%
Nev.
30.4%
31.9%
0.0%
0.0%
37.8%
N.H.
61.6%
0.0%
2.4%
12.4%
23.6%
Ore.
34.0%
0.0%
39.7%
4.3%
22.0%
Pa.
28.7%
17.0%
26.5%
4.1%
23.7%
Wis.
36.2%
18.7%
27.2%
3.5%
14.2%
Wyo.
34.1%
32.9%
0.0%
0.0%
33.0%
Sales Tax and Average Income Tax
Rates
Scatterplot of Avg Tax vs salesT
9
8
7
Avg Tax
6
5
4
3
2
1
0
0
1
2
3
4
5
salesT
6
7
8
9
The Zero States…
0% Sales Tax Rate
0% State Income Tax Rate
AK – Alaska
AK - Alaska
DE - Delaware
NH* - New Hampshire
MT - Montana
SD – South Dakota
NH – New Hampshire
WY - Wyoming
OR - Oregon
FL - Florida
TX – Texas
WA – Washington
NY – New York
TN - Tennessee
Interesting Period?
• Current political climate (“9-9-9”, etc) makes
this topic important now
• Looking at data from period since the ‘credit
crunch’ – 2009.
• Will the economic miasma of the period
overwhelm results?
Data
• Changes in Personal Income by State
– BEA
• Average Income Tax Rate
– Federation of Tax Administrators
• State Sales Tax Rate
– Federation of Tax Administrators
• Savings Rate?
– Interest Income by state: IRS.gov
– Adult Population by state: US Stat Abstract
Creation of “Savings Rate”
• Interest Income = Interest Rate*Total Savings
• First Difference:
– Change in Int Income=Interest Rate*Change in Savings + Change
in R*Total Savings
– So, Change in Savings=(Change in Int Income – Change in R
*Total Savings)/Interest Rate
– We know: Change in Savings/Population = Savings Rate
– Change in Interest Rate and Interest Rate Constant Across
States
• %Change in Interest Income/Adult Population
– Proportional to Savings Rate?
• OR Interest Income/Adult Population
– Proportional to Savings Rate?
Data Summary, 2009
Variable
Mean
StDev
Minimum
Maximum
AvgTax
3.863
2.106
0.000
8.000
SalesTax
5.031
2.044
0.000
8.250
%ChangeSave/Pop -.001682 .003660
-.02391
.006686
IncomeChange
1.544
-5.900
1.800
InterestIncome/Pop 643.7
174.8
384.9
1186.1
32128
5903
23080
49325
Income/Pop
-2.124
“SaveRate”=%Change in Interest
Income/pop vs. Income Change
“SaveRate”=%Change in Interest
Income/Pop vs. Sales Tax
“SaveRate”=% Change in Interest
Income/Pop vs. Income Tax Rate
Interest Income/Pop vs. Income Tax
Interest Income/Pop vs. Sales Tax
Interest Income/Pop vs. Income/Pop
%Change in Interest Income/Pop = y
Coefficient
(T-Stat)
Constant
-.00266
(-2.73)**
IncTaxRate
.0000583
(.45)
SalesTax
.00026189
(2.09)**
IncChange
.0000605
(.33)
R2
F
9.4
1.58
Results: Per Cent Change Per Person
• Sales Tax Significant, suggests increases in
sales tax correlated with increase in savings
rates
– Consistent with theory; incentive to reduce
spending
– Inelastic at mean (.7833)
• Implies that an increase in sales tax has
negative incentives for spending causing
increases in saving…
Interest Income/Pop = y
Coefficient
(T-Stat)
Constant
-12.0
(-.10)
IncTaxRate
-10.536
(-1.17)
SalesTax
-.0155
(-.02)
Income/Pop
.021837
(7.16)**
R2
F
53.4
17.21
Results: Levels Per Person
• Only Income Per Person is significant
• Sign on Income Tax rate is consistent, not
significant
• Sales Tax does not have consistent sign or
significance
• Implies that there is no tax structure effect on
savings…
Now What?
• 2009 was unusual year – economic miasma
• Levels or Percentage Changes?
Elasticities
Avg. Tax
Elasticity at
Mean
-.13389
SalesTax
-.7833