Why Have Private Saving Rates in the United States and Canada Diverged?

Working Paper: NBER ID: w2319

Authors: Chris Carroll; Lawrence H. Summers

Abstract: One of the central questions in macroeconomics for many years has been whether government policy can affect private saving rates, and if so to what extent and through what channels. The question has remained controversial because, as with other macroeconomic questions, experiments to check divergent hypotheses cannot be deliberately performed, so economists must rely upon the often dubious evidence from the limited experiments with which nature and history have endowed us. This paper discusses the results of an exceptionally good natural experiment that has been provided by Canada and the U.S. over the past thirty-five years. After moving in tandem for almost 25 years, American and Canadian private saving rates have diverged dramatically over the last decade. The primary conclusion emerging from our analysis of this phenomenon is that tax policies can have a potent impact on private savings behavior. Differences in tax structures and in the interactions of taxation and inflation appear to be important factors explaining the divergent behavior of the American and Canadian private savings rates. Recognizing the importance of asset revaluations, caused partially but not entirely by tax effects, also helps to explain the different behavior of U.S. and Canadian savings. There may also be a relationship between government deficits and the private savings differential.

Keywords: Private savings; Tax policy; Canada; United States

JEL Codes: E21; E62

Causal Claims

Cause	Effect
tax policies (H29)	private savings behavior (D14)
differences in tax structures (H20)	divergent trends in private savings rates (E21)
taxation and inflation interactions (H29)	divergent trends in private savings rates (E21)
asset revaluations due to tax effects (H25)	divergence in private savings rates (D14)
government deficits (H62)	private savings differentials (D14)