Taxing Capital? The Importance of How Human Capital is Accumulated (original) (raw)

The Effect of Endogenous Human Capital Accumulation on Optimal Taxation

SSRN Electronic Journal, 2012

This paper considers the impact of endogenous human capital accumulation on optimal tax policy in a life cycle model. Including endogenous human capital accumulation, either through learning-by-doing or learning-or-doing, is analytically shown to create a motive for the government to use age-dependent labor income taxes. If the government cannot condition taxes on age, then it is optimal to use a tax on capital in order to mimic such taxes. Quantitatively, introducing learning-by-doing or learning-ordoing increases the optimal tax on capital by forty or four percent, respectively. Overall, the optimal tax on capital is thirty five percent higher in the model with learning-by-doing compared to the model with learning-or-doing implying that how human capital accumulates is of significant importance when determining the optimal tax policy.

Optimal Taxation in Life Cycle Models

2011

This paper considers the impact of endogenous human capital accumulation on optimal tax policy in a life cycle model. Analytically, it demonstrates that including endogenous human capital accumulation, through either learning-by-doing or learning-or-doing, creates a motive for the government to use age-dependent labor income taxes. If the government cannot condition taxes on age, then it is optimal to use a tax on capital in order to mimic age-dependent taxes on labor income. Quantitatively, this work finds that introducing learning-by-doing or learning-or-doing increases the optimal tax on capital by eighty or twenty percent, respectively. Including learning-by-doing leads younger agents to supply labor relatively less elastically than older agents. Given that taxing capital implicitly taxes younger labor income at a higher rate, the optimal tax on capital is larger in this framework. In the case of learning-or-doing, the government increases the tax on capital to encourage individuals to save in the form of human capital as opposed to physical capital.

Human capital and optimal positive taxation of capital income

International Tax and Public Finance, 2009

This paper analyzes optimal linear and non-linear taxes on capital and labor incomes in a life-cycle model of human capital investment, financial savings, and labor supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labor income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labor tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labor income if savings are elastic compared to investment in human capital, substitution between verifiable and non-verifiable inputs in human capital formation is difficult, and most investments in human capital are verifiable so that education subsidies can directly reduce the tax wedge on learning. Numerical calculations suggest that the optimal marginal tax rate on capital income is substantial.

Income Taxation and Finite Horizons in a Human Capital Model

2000

We address the issue of capital vs. labor income taxation in an overlapping generations model with a positive externality in the human capital production. We compare the performance of the economy in the steady state under different tax policies. Three results are obtained. First, the size of the tax revenue required strongly affects the optimal (welfare maximizing) capital-labor income tax portfolio. In particular, a zero physical capital income tax rate need not be optimal. Second, the way in which the finite life cycle is split between the working and the retirement period also matters. And third, the size of the externality in the human capital production also affects the optimal income tax rate mix.

Human Capital, Life-cycle, and the “Optimal“ Tax and Transfer Base

The choice of the direct tax base has been discussed extensively in traditional tax theory and optimal taxation. In spite of the vast literature on this problem most of the questions remained controversial. This paper highlights the most important facts and tries to give some conclusive answers. For the proof of the argumentation an individual life-cycle approach is combined with human capital which is estimated from the expected income flows. This approach illustrates that all tax bases (labor income, capital income, consumption, wealth, inheritance etc.) are related to lifetime labor income and neutrality would impose to tax all parts of income once and only once in a lifetime perspective. Videos: http://www.cisan.unam.mx/ingles/videos2012.php http://www.youtube.com/watch?v=tVZEtjLYrUY&feature=youtu.be

On Income and Capital Taxation in a Life Cycle Model with Extensive Labor Supply

2009

The paper studies redistributive taxation in a stationary life cycle model with extensive labor supply. Two forms of taxation are investigated in some depth: nonlinear income taxation and linear capital taxation. The optimal income taxation programs of the life cycle and of the static model have similar properties. The life cycle model differs in that the social weights of the dynasties depend on their permanent incomes, not on the observed taxable current income, which is an imperfect signal of the variable of interest. A tax on saving therefore appears as a potentially useful complement to the income tax. The formula for the derivative of social welfare with respect to the tax rate is derived when financial markets are perfect. This derivative, evaluated at the point of zero capital tax, is equal to the opposite of the correlation between the social weight of the dynasties and their aggregate life time savings. When high permanent incomes induce high savings, a tax on capital may have redistributive value, as illustrated on a simple example. JEL classification numbers: H21, H31.

Welfare-maximizing tax structure in a model with human capital

Economics Letters, 2000

This paper studies the welfare-maximizing tax structure in a two-sector model of endogenous growth with human capital. Here, tax structure refers to the mix of taxes which satisfy an exogenously given government budget constraint.

Optimal Wage Taxation When Human Capital and Employment Are Endogenous

Economic Inquiry, 2008

This paper studies how optimal wage tax conclusions from the classic two-period life cycle model of human capital accumulation are affected by endogenizing the number of taxpaying workers. In the absence of a corrective policy, young individuals underinvest in human capital from a social perspective because tax premiums for transfers to nonworkers are not actuarially adjusted downward for human capital attainment. A combination of wage taxes and wage subsidies can restore proper price signals. Numerical simulations suggest that even modest employment elasticities can be sufficient to substantially impact the magnitudes and even the signs of optimal wage tax rates. (JEL H21, H3, J24)

Optimal Taxation in Life-Cycle Economies

Journal of Economic Theory, 2002

We use a very standard life-cycle growth model, in which individuals have a labor-leisure choice in each period of their lives, to prove that an optimizing government will almost always find it optimal to tax or subsidize interest income. The intuition for our result is straightforward. In a life-cycle model the individual's optimal consumption-work plan is almost never constant and an optimizing government almost always taxes consumption goods and labor earnings at different rates over an individual's lifetime. One way to achieve this goal is to use capital and labor income taxes that vary with age. If tax rates cannot be conditioned on age, a non-zero tax on capital income is also optimal, as it can (imperfectly) mimic age-conditioned consumption and labor income tax rates.

Taxing human capital efficiently

2007

Assuming isoelastic returns to education and an endogenous supply of qualified and nonqualified labour, it is shown to be second-best efficient not to distort the choice of education. Furthermore, taxation should set incentives so that qualified labour is substituted for nonqualified labour. As a result, it is efficient to tax labour income regressively with respect to qualification and to tax the monetary cost of education at a level that restores efficiency in education. A tax on capital income alleviates the distortion that progressive taxation of labour income exerts on human-capital investment.