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Optimal Taxation of Human Capital and the Earnings Function

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  • BAS JACOBS
  • A. LANS BOVENBERG

Abstract

This paper explores how the specification of the earnings function impacts the optimal tax treatment of human capital. If education is complementary to labor effort, education should be subsidized to offset tax distortions on labor supply. However, if most of the education is enjoyed by high ability households, education should be taxed in order to redistribute resources to the poor. The paper identifies the exact conditions under which these two effects cancel and education should be neither taxed nor subsidized. In particular, with non-linear tax instruments, education should be weakly separable from labor and ability in the earnings function. With linear taxes, education should also feature a constant elasticity in a weakly separable earnings function.

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Bibliographic Info

Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 13 (2011)
Issue (Month): 6 (December)
Pages: 957-971

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Handle: RePEc:bla:jpbect:v:13:y:2011:i:6:p:957-971

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References

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  1. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September.
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  5. 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.
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Citations

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Cited by:
  1. Mendolicchio, Concetta & Paolini, Dimitri & Pietra, Tito, 2012. "Asymmetric information and overeducation," IAB Discussion Paper 201214, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  2. C. Mendolicchio & D. Paolini & T. Pietra, 2010. "Income taxes, subsidies to education, and investments in human capital," Working Papers 701, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Wolfram F. Richter, 2010. "Efficient Education Policy - A Second-Order Elasticity Rule," CESifo Working Paper Series 2969, CESifo Group Munich.
  4. Dan Anderberg, 2008. "Optimal Policy and the Risk Properties of Human Capital Reconsidered," CESifo Working Paper Series 2451, CESifo Group Munich.
  5. Dirk Schindler & Benjamin Weigert, 2008. "Educational and Wage Risk: Social Insurance vs. Quality of Education," CESifo Working Paper Series 2513, CESifo Group Munich.
  6. Wolfram F. Richter, 2009. "Taxing Education in Ramsey's Tradition," CESifo Working Paper Series 2586, CESifo Group Munich.
  7. Bas Jacobs & Dirk Schindler & Hongyan Yang, 2009. "Optimal Taxation of Risky Human Capital," CESifo Working Paper Series 2529, CESifo Group Munich.
  8. Wolfram F. Richter & Christoph Braun, 2010. "Efficient Subsidization of Human Capital Accumulation with Overlapping Generations and Endogenous Growth," CESifo Working Paper Series 2982, CESifo Group Munich.
  9. Dirk Schindler & Benjamin Weigert, 2008. "Insuring Educational Risk: Opportunities versus Income," CESifo Working Paper Series 2348, CESifo Group Munich.
  10. Mendolicchio, Concetta & Paolini, Dimitri & Pietra, Tito, 2009. "Income tax, subsidies to education, and investments in human capital in a two-sector economy," MPRA Paper 14772, University Library of Munich, Germany.
  11. Wolfram F. Richter & Lars Kunze, 2011. "Taxing Human Capital Efficiently when Qualified Labour is Mobile," CESifo Working Paper Series 3366, CESifo Group Munich.
  12. Matthew C. Weinzierl, 2014. "Revisiting the Classical View of Benefit-Based Taxation," Harvard Business School Working Papers 14-101, Harvard Business School.
  13. Wolfram F. Richter & Berthold U. Wigger, 2012. "Besteuerung des Humanvermögens," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 13(1-2), pages 82-102, 02.
  14. Dirk Schindler, 2011. "Tuition Fees and the Dual Income Tax: The Optimality of the Nordic Income Tax System Reconsidered," German Economic Review, Verein für Socialpolitik, vol. 12(1), pages 59-84, 02.
  15. Bas Jacobs, 2013. "Optimal redistributive tax and education policies in general equilibrium," International Tax and Public Finance, Springer, vol. 20(2), pages 312-337, April.

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