MU Public Sector Economics Tax Free Saving Accounts Discussion

Question Description

I’m working on a economics question and need an explanation to help me understand better.

In 2009, the Government of Canada introduced Tax-Free Savings Accounts(TFSAs). The rules for TFSAs allowed Canadian citizens and residents overthe age of 18 to open an account and contribute up to $5,000 per year. Whilecontributions to TFSAs are not tax deductible, investment income (interest,dividends capital gains etc.) earned on assets held in a TFSA are exemptfrom taxation. Withdrawals of principal and investment income from TFSAsare not taxed.

(a) Suppose an individual receives income I0 = $10, 000 in period 0 and I1 = $0in period 1. Sketch the inter-temporal budget constraint associated with aTFSA. Compare this budget constraint to the budget constraint that pre-vailed before TFSAs were introduced.

(b) Will TFSAs increase private saving in the setting described in part (a)?Your answer should reference the economic theory and empirical evidencementioned in class (i.e. the lecture videos and virtual tutorials).

(c) Will TFSAs increase national/social saving (i.e. the sum of private andpublic saving) in the setting described in part (a)? Your answer shouldreference the economic theory and empirical evidence mentioned in class(i.e. the lecture videos and virtual tutorials).

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