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Optimal Taxation of Risky Human Capital

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  • Bas Jacobs
  • Dirk Schindler
  • Hongyan Yang

Abstract

In a model with ex-ante homogenous households, earnings risk and a general earnings function, we derive the optimal linear labor tax rate and optimal linear education subsidies. The optimal income tax trades off social insurance against incentives to work and to invest in human capital. Education subsidies are not used for social insurance, but are only targeted at off-setting the distortions of the labor tax and internalizing a fiscal externality. Both optimal education subsidies and tax rates increase if labor and education are more complementary, since education subsidies indirectly lower labor tax distortions by stimulating labor supply. Optimal education subsidies (taxes) also correct non-tax distortions arising from missing insurance markets. Education subsidies internalize a positive (negative) fiscal externality if there is underinvestment (overinvestment) in education due to risk. Education policy unambiguously allows for more social insurance if education is a risky activity. However, if education hedges against labor market risk, optimal tax rates could be lower than without education subsidies.
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Suggested Citation

  • Bas Jacobs & Dirk Schindler & Hongyan Yang, 2012. "Optimal Taxation of Risky Human Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 908-931, September.
    • Handle: RePEc:bla:scandj:v:114:y:2012:i:3:p:908-931
    DOI: j.1467-9442.2012.01707.x
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    Cited by:

    1. Findeisen, Sebastian & Sachs, Dominik, 2011. "Education and Optimal Dynamic Taxation," IZA Discussion Papers 6056, Institute of Labor Economics (IZA).
    2. Dominik Sachs & Sebastian Findeisen, 2016. "Optimal Financial Aid Policies for Students," 2016 Meeting Papers 1421, Society for Economic Dynamics.
    3. Stefanie Stantcheva, 2015. "Optimal Income, Education, and Bequest Taxes in an Intergenerational Model," NBER Working Papers 21177, National Bureau of Economic Research, Inc.
    4. Anderberg, Dan, 2009. "Optimal policy and the risk properties of human capital reconsidered," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1017-1026, October.
    5. Dirk Schindler & Hongyan Yang, 2015. "Catalysts for social insurance: education subsidies versus physical capital taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(2), pages 274-310, April.
    6. Robin Boadway & Motohiro Sato, 2015. "Optimal Income Taxation with Risky Earnings: A Synthesis," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(6), pages 773-801, December.
    7. OBARA, Takuya, 2018. "Optimal human capital policies under the endogenous choice of educational types," CCES Discussion Paper Series 66_v2, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    8. Concetta Mendolicchio & Dimitri Paolini & Tito Pietra, 2014. "Income Taxes, Subsidies to Education, and Investments in Human Capital," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(1), pages 24-47, February.
    9. Mendolicchio Concetta & Paolini Dimitri & Pietra Tito, 2012. "Asymmetric Information And Overeducation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-29, October.
    10. Bas Jacobs & Hongyan Yang, 2013. "Second-Best Income Taxation with Endogenous Human Capital and Borrowing Constraints," CESifo Working Paper Series 4155, CESifo.
    11. Sebastian Findeisen & Dominik Sachs, 2015. "Designing Efficient College and Tax Policies," CESifo Working Paper Series 5435, CESifo.
    12. Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, vol. 138(C), pages 1-21.
    13. Robin Boadway & Motohiro Sato, 2011. "Optimal Income Taxation with Uncertain Earnings: A Synthesis," CESifo Working Paper Series 3654, CESifo.
    14. Mookherjee, Dilip & Napel, Stefan, 2021. "Welfare rationales for conditionality of cash transfers," Journal of Development Economics, Elsevier, vol. 151(C).
    15. OBARA, Takuya, 2017. "Optimal human capital policies under the endogenous choice of educational types," CCES Discussion Paper Series 66, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.

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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I20 - Health, Education, and Welfare - - Education - - - General
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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