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Tax Reform and Human Capital Accumulation: Evidence from an Empirical General Equilibrium Model of Skill Formation

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  • Taber Christopher

    (Northwestern University)

Abstract

The progressivity of the tax system has a potentially large disincentive effect on human capital accumulation. It is thus surprising that Heckman, Lochner, and Taber (1998b, 1999a,b) represent the only previous empirical work on this important topic. I build on their work a) by accounting for the tax system when estimating the model, b) by performing welfare analysis, c) by examining the transition from one steady state to another, and d) by adding a number of robustness checks. I first estimate a dynamic general equilibrium model of schooling and on-the-job training on micro data. The estimates are then used to measure the extent to which the progressivity of the tax system distorts human capital. I find a small long run effect of progressivity on schooling. I find larger short run effects, but that they are short lived. The impact of the reform on human capital acquired on the job depends on how it is measured. Under one measure the effect is large, but the consequence of this on earnings seems to be small. Perhaps surprisingly, the welfare effects are typically favorable for progressive wage taxes (with flat capital taxation) versus a flat income tax in the long run. The welfare effects are different when I examine a progressive income tax as virtually all workers prefer the flat income tax to it. I also build on Heckman, Lochner, and Taber's (1998b,1999a,b) evidence on the extent to which taxation of physical capital favors human capital investment. These simulations also yield small long run effects on schooling and on human capital stocks.

Suggested Citation

  • Taber Christopher, 2002. "Tax Reform and Human Capital Accumulation: Evidence from an Empirical General Equilibrium Model of Skill Formation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-38, October.
  • Handle: RePEc:bpj:bejeap:v:advances.2:y:2002:i:1:n:3
    DOI: 10.2202/1538-0637.1048
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    1. Janice Ballou & Matthew Mishkind & Geraldine Mooney & Welmoet van Kammen, "undated". "National Science Foundation Report on Efficiency of Grant Size and Duration: Principal Investigator FY 2001 Grant Award Survey and Institutional Survey," Mathematica Policy Research Reports bdadbcef4daf4bf8b94a0fb7f, Mathematica Policy Research.
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    2. Bohacek, Radim & Kapicka, Marek, 2008. "Optimal human capital policies," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 1-16, January.
    3. Zodrow, George R. & Diamond, John W., 2013. "Dynamic Overlapping Generations Computable General Equilibrium Models and the Analysis of Tax Policy: The Diamond–Zodrow Model," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 743-813, Elsevier.
    4. Francisco de Castro Fernández & José Manuel González Mínguez, 2008. "The composition of public finances and long-term growth: a macroeconomic approach," Occasional Papers 0809, Banco de España.
    5. Cassou, Steven P. & Gorostiaga, Arantza & Uribe-Zubiaga, Iker, 2013. "Policy effects of the elasticity of substitution across labor types in life cycle models," Economic Modelling, Elsevier, vol. 35(C), pages 59-70.
    6. Shintaro Yamaguchi, 2007. "Career and Skill Formation: A Dynamic Occupational Choice Model with Multidimensional Skills," Department of Economics Working Papers 2007-02, McMaster University.
    7. Maisonnave, Hélène & Decaluwé, Bernard, 2008. "Educational Policy, Growth and Labor Market in South Africa: A Dynamic Computable General Equilibrium Analysis," Conference papers 331689, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    8. Carl Sanders & Christopher Taber, 2012. "Life-Cycle Wage Growth and Heterogeneous Human Capital," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 399-425, July.
    9. Annabi, Nabil & Harvey, Simon & Lan, Yu, 2011. "Public expenditures on education, human capital and growth in Canada: An OLG model analysis," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 852-865.
    10. Uli KLEINWECHTER, 2010. "A Utility Function Based Approach Towards the Modeling of Migration in Village Equilibrium Models," EcoMod2010 259600092, EcoMod.

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