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McMaster University Taxation Versus Savings Metrics Discussion

McMaster University Taxation Versus Savings Metrics Discussion

Question Description

I’m working on a translation & languages exercise and need an explanation to help me learn.

Please help me to correct some grammatical mistakes and make the text seem clearer.

The topic for this week is personal taxation and behaviour and I’ll mainly talk about personal saving responses to taxes. First of all, we will use the life cycle model to learn about how taxes affect people’s saving choices. A life cycle model means that an individual live for multiple periods and must decide the amount of consumption and saving according to a life-time budget constraint. Under such a hypothesized model, the first-stage savings would be fully used up in the second stage while the second-stage income comes from the interest. Secondly, the impact of taxes on saving. There are income and substitution effects. Income effect means that tax can bring down the disposable income and thus reduce the tax-payers’ current consumption and increase savings in order to maintain the current level of savings (for future expense). Hence, when the government increases taxes, taxpayers often save more. As for the substitution effect, it means that tax can reduce the actual interest income of the taxpayers and thus reduce the appeal of savings so that taxpayers consumption more rather than save more. Hence, by increasing tax, it can bring down the savings. Tax mainly influence savings by interest levels. The personal income tax also depends on whether individuals rely more on substitution effect or the income effect. For those relying moreon the former, interest tax reduces the opportunity cost of current consumption, thus tax drives them to spend more and save less. For those relying more the latter, tax reduces their future purchasing power. In order to guarantee their future consumption, they would save more and spend less. Meanwhile, there are empirical evidence on savings responses to taxes. In order to encourage savings, saving accounts in Canada can enjoy the tax preferential policy. There are two types of accounts in Canada, that is tax deductible/tax-deferred accounts and tax pre-paid accounts. For instance, retirement and pension account. Saving for old age is absolutely necessary. Government subsidies are not sufficient to cover all basic needs of all people and savings are indispensable supplement. However, whether such specific accounts, like PPSPs, would stimulate more savings relies on the source of income. For example, transferring money from other accounts to the pension account, and reducing consumption and increasing savings, as well as reducing the tax of account can also stimulate more savings. Pension accounts with tax preferences will help optimize the future asset.


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