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Tax Progression and Human Capital in Imperfect Labour Markets

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  • Clemens Fuest
  • Bernd Huber

Abstract

Recent contributions to the theory of taxation argue that tax progression raises welfare and employment in the presence of labour market imperfections. This literature takes the endowment of workers with human capital as given. The present paper analyses the effects of tax progression in a model with endogenous human capital formation. We show that the effect of tax progression on human capital investment depends on the deductibility of the cost of human capital formation. With full deductibility, tax progression raises employment and welfare. With incomplete deductibility, in contrast, the effect of tax progression on employment and welfare may be negative. Copyright Verein fü Socialpolitik and Blackwell Publishers Ltd 2001.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 2 (2001)
Issue (Month): 1 (02)
Pages: 1-18

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Handle: RePEc:bla:germec:v:2:y:2001:i:1:p:1-18

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References

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  1. Stephen Nickell & Brian Bell, 1996. "Would cutting payroll taxes on the unskilled have a significant effect on unemployment?," LSE Research Online Documents on Economics 20687, London School of Economics and Political Science, LSE Library.
  2. Sorensen, Peter Birch, 1999. "Optimal tax progressivity in imperfect labour markets," Labour Economics, Elsevier, vol. 6(3), pages 435-452, September.
  3. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April.
  4. Fuest, Clemens & Huber, Bernd, 2000. "Is tax progression really good for employment? A model with endogenous hours of work," Labour Economics, Elsevier, vol. 7(1), pages 79-93, January.
  5. Agell, Jonas & Lommerud, Kjell Erik, 1997. "Minimum wages and the incentives for skill formation," Journal of Public Economics, Elsevier, vol. 64(1), pages 25-40, April.
  6. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August.
  7. Fuest, Clemens & Huber, Bernd, 2000. "Is tax progression really good for employment? A model with endogenous hours of work," Munich Reprints in Economics 20296, University of Munich, Department of Economics.
  8. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
  9. Cahuc, P. & Michel, P., 1992. "Minimum Wage, Unemployment and Growth," Papiers d'Economie Mathématique et Applications 92.35, Université Panthéon-Sorbonne (Paris 1).
  10. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
  11. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September.
  12. Hansen, Claus Thustrup, 1999. " Lower Tax Progression, Longer Hours and Higher Wages," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(1), pages 49-65, March.
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Cited by:
  1. Hungerbuhler, Mathias, 2007. "Tax progression and training in a matching framework," Labour Economics, Elsevier, vol. 14(2), pages 185-200, April.
  2. Wöhlbier, Florian, 2002. "Subsidising Education with Unionised Labour Markets," Discussion Papers in Economics 7, University of Munich, Department of Economics.
  3. Boeters, Stefan, 2009. "Optimal tax progressivity in unionised labour markets: what are the driving forces?," ZEW Discussion Papers 09-065, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Bohringer, Christoph & Boeters, Stefan & Feil, Michael, 2005. "Taxation and unemployment: an applied general equilibrium approach," Economic Modelling, Elsevier, vol. 22(1), pages 81-108, January.
  5. van Ewijk, Casper & Tang, Paul J.G., 2007. "Unions, progressive taxes, and education subsidies," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1119-1139, December.
  6. Boeters, Stefan & Böhringer, Christoph & Feil, Michael, 2002. "Taxation and unemployment: an applied general equilibrium approach for Germany," ZEW Discussion Papers 02-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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