Income Taxation and Finite Horizons in a Human Capital Model (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.

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.

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.

Taxing Capital? The Importance of How Human Capital is Accumulated

Finance and Economics Discussion Series, 2015

This paper considers the impact of how human capital is accumulated on optimal capital tax policy in a life cycle model. In particular, it compares the optimal capital tax when human capital is accumulated exogenously, endogenously through learning-by-doing, and endogenously through learning-or-doing. Previous work demonstrates that in a simple two generation life cycle model with exogenous human capital accumulation, if the utility function is separable and homothetic in each consumption and labor, then the government has no motive to condition taxes on age or tax capital. In contrast, this paper demonstrates analytically that adding either form of endogenous human capital accumulation creates a motive for the government to use age-dependent labor income taxes. Moreover, if the government cannot condition taxes on age, then a capital tax can be optimal in order to mimic such taxes. This paper quantitatively explores the strength of this channel and finds that, includ ing human capi...

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 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, 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 Wealth Taxation in A Life-Cycle Model with Extensive Labour Supply*

The Economic Journal, 2011

In a stationary life-cycle model with extensive labour supply, two forms of taxation are studied: nonlinear income taxation and linear wealth taxation. In the life-cycle model, the social weights of the dynasties depend on their permanent incomes, not on the observed taxable current income. A tax on wealth then can complement income tax as a redistributive tool. The derivative of social welfare with respect to the wealth tax rate at the no-tax point is computed. It is positive whenever permanent income is positively correlated with aggregate life time savings. This result is illustrated on a numerical example.

Accounting for the “disconnectedness” of the economy in OLG models: A case for taxing capital income

Economic Modelling, 2008

The paper extends the works by Judd [K.L. Judd, Redistributive Taxation in a Simple Perfect Foresight Model, J. Public Econ. 28 (1985), 59-83.] and Chamley [C. Chamley, Optimal taxation of capital income in general equilibrium with infinite lives, Econometrica, 54 (1986), 607-622.], who establish that in the long run the capital income tax should be zero, by considering a discrete time version of the Blanchard-Buiter-Weil perpetual youth model. We show that an independent source of non-zero taxation arises whenever the economy is "disconnected" and this feature is properly taken into account by the policymaker. More precisely, if the weight attached to each cohort in the social welfare function equals the corresponding actual share in the population, there is a force pushing towards positive taxation of capital income, which acts as a Pigouvian intervention. Moreover, room for this intertemporal correction shrinks as the relative weight of a cohort tends to zero: thus, the optimal tax rate decreases with age and tends to zero for the oldest. We also show that our result depends neither on life-cycle behavior, as pointed out by the previous literature on OLG models, nor on population growth. tax rate result holds in general, since the elasticity of consumption is typically not constant over life, and, more importantly, even at the steady state, because of life-cycle behavior. 2 The aim of this work is to deepen the analysis of optimal dynamic capital income taxation in OLG models by working out a discrete time version of the perpetual youth (PY) model à la , , , in order to show that the presence of life-cycle behavior is not a necessary condition for a non-zero capital income tax rate to obtain in the long run.

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)