Working Paper: NBER ID: w26700
Authors: Mattia Landoni; Stephen P. Zeldes
Abstract: Under standard assumptions, both individuals and the government are indifferent between traditional tax-deferred retirement accounts and “front-loaded” (Roth) accounts. When we add investment fees to this benchmark, individuals are still indifferent but the government is not. We estimate that tax deferral increases demand for asset management services by $3 trillion, causing the government to pay $20.7 billion in corresponding annual fees. In a general equilibrium model with asset management services as differentiated products, we examine the incidence and welfare implications of the added demand. Tax deferral in our model produces a larger asset management industry, higher taxes, and lower social welfare.
Keywords: tax-deferred retirement accounts; investment fees; social welfare; general equilibrium model; Roth accounts
JEL Codes: D14; G11; G23; G28; G51; H21; J26; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax Deferral (H26) | Demand for Asset Management Services (G29) |
| Demand for Asset Management Services (G29) | Government Investment Fees (H54) |
| Tax Deferral (H26) | Government Investment Fees (H54) |
| Tax Deferral (H26) | Larger Asset Management Industry (G23) |
| Larger Asset Management Industry (G23) | Higher Taxes (H29) |
| Higher Taxes (H29) | Lower Social Welfare (D69) |
| Switch from Traditional to Roth Accounts (J26) | Change in Dynamics of Fees and Welfare Outcomes (D69) |