Tax-Deferred Savings Plans and Interest Deductibility

Programs that defer taxes on savings (e.g., RRSPs or 401(k)s) are supposed to move income tax systems closer to the more efficient consumption tax. Whether or not RRSPs move income tax systems away from or closer to a consumption tax depends on whether or not interest on debts incurred to make RRSP contributions is deductible for income tax purposes. If people optimize as assumed in simple life-cycle models, then it may be that governments can convert a non-linear income tax system to a proportional consumption tax system. I argue this is plausible for some Canadian households