Goda, Jones, and Ramnath (2022) calculate the MVPF of a penalty holiday on early withdrawals from individual Retirement Accounts (IRAs). IRAs afford taxpayers a higher return on savings through a lack of taxation on returns and the deferral of taxation on earnings until the saving are withdrawn but also impose a 10 percent penalty on most withdrawals before age 59.5. The paper uses administrative tax data and exploits variation in exposure to a one-year penalty holiday driven by date of birth to examine withdrawal behavior in a short window before and after the age when the penalty is lifted. They find a 3-3.5x increase in withdrawals relative to the baseline level after the penalty’s expiration, which declines to 2x the baseline after one month.
MVPF = 1.5
The primary cost to the government from a penalty holiday is the value of forgone penalties on early withdrawal less the additional tax revenue from the marginal increase in average withdrawals due to the penalty holiday.
The net cost is therefore $0.1 – $0.03 = $0.07 per $1 withdrawn.
For the duration of the penalty holiday, the daily average of withdrawals that would have been made in the absence of the penalty holiday is referred to as the inframarginal withdrawals. Willingness to pay is the value of avoided penalties or the penalty rate (10%) applied to the share of inframarginal withdrawals that would have been subject to the penalty. The willingness to pay is therefore $0.1 per $1 withdrawn.
The MVPF of a 1-year penalty holiday occurring 5 years earlier than age 59.5, is then the ratio of the willingness to pay to the total cost US$0.10/US$0.07 = 1.47.
The authors note that if the one-year holiday occurs 10 years earlier than age 59.5, the MVPF becomes 3.41.
Gopi Shah Goda, Damon Jones, and Shanthi Ramnath (2022). “Temporary and Permanent Effects of Withdrawal Penalties on Retirement Savings Accounts.” Journal of Public Economics, 215: 104734. https://doi.org/10.1016/j.jpubeco.2022.104734