Tax Policy and Corporate Saving

James M. Poterba

JMP

James M. Poterba Massachusetts Institute Technology

Discussants: R. Glenn Hubbard and

R. Glenn Hubbard Dean and Russell L. Carson Professor of Finance and Economics - Columbia Business School

Robert E. Hall

Robert E. Hall Robert and Carole McNeil Joint Hoover Senior Fellow and Professor of Economics - Stanford University

ALTHOUGH CORPORATIONS are responsible for roughly half of private saving in the United States, most studies of saving focus exclusively on household behavior. Policy initiatives to increase saving have also concentrated on personal saving, through such measures as Individual Retirement Accounts and reductions in marginal tax rates. The Tax Reform Act of 1986 is likely to prove a particularly costly example of the neglect of corporate saving. The new law increases corporate taxes approximately$ 120 billion over the next five years and reduces the tax incentives for retaining corporate earnings. Even if it does not affect pretax corporate earnings, it could reduce corporate saving between $30 billion and $40 billion a year by 1989.