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Income Taxation and Finite Horizons in a Human Capital Model

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  • Cruz Echevarria
  • Amaia Iza

Abstract

We address the issue ofcapital vs. labor income taxation in an overlapping generationsmodel with a positive externality in the human capital production.We compare the performance of the economy in the steady stateunder different tax policies. Three results are obtained. First,the size of the tax revenue required strongly affects the optimal(welfare maximizing) capital-labor income tax portfolio. Inparticular, a zero physical capital income tax rate need notbe optimal. Second, the way in which the finite life cycle issplit between the working and the retirement period also matters.And third, the size of the externality in the human capital productionalso affects the optimal income tax rate mix. Copyright Kluwer Academic Publishers 2000

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File URL: http://hdl.handle.net/10.1023/A:1008729426519
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 7 (2000)
Issue (Month): 6 (December)
Pages: 665-689

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Handle: RePEc:kap:itaxpf:v:7:y:2000:i:6:p:665-689

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: human capital; income taxation; lifetime horizon;

References

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  1. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
  2. 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.
  3. Seidman, Laurence S, 1983. "Taxes in a Life Cycle Growth Model with Bequests and Inheritances," American Economic Review, American Economic Association, vol. 73(3), pages 437-41, June.
  4. E. John Driffill & Harvey S. Rosen, 1984. "Taxation and Excess Burden: A Life-Cycle Perspective," NBER Working Papers 0698, National Bureau of Economic Research, Inc.
  5. Paul Romer, 1991. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  6. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "On the taxation of human and physical capital in models of endogenous growth," Journal of Public Economics, Elsevier, vol. 70(2), pages 237-254, November.
  7. James Davies & John Whalley, 1991. "Taxes and Capital Formation: How Important is Human Capital?," NBER Chapters, in: National Saving and Economic Performance, pages 163-200 National Bureau of Economic Research, Inc.
  8. Andrew Atkeson & V.V. Chari & Patrick J. Kehoe, 1999. "Taxing capital income: a bad idea," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-17.
  9. Martin Feldstein, 1983. "Behavioral Simulation Methods in Tax Policy Analysis," NBER Books, National Bureau of Economic Research, Inc, number feld83-2, May.
  10. Razin, Assaf & Yuen, Chi-Wa, 1996. "Capital income taxation and long-run growth: New perspectives," Journal of Public Economics, Elsevier, vol. 59(2), pages 239-263, February.
  11. Seidman, Laurence S, 1984. "Conversion to a Consumption Tax: The Transition in a Life-Cycle Growth Model," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 247-67, April.
  12. Alan J. Auerbach & Laurence J. Kotlikoff & Jonathan Skinner, 1983. "The Efficiency Gains from Dynamic Tax Reform," NBER Working Papers 0819, National Bureau of Economic Research, Inc.
  13. Uhlig, Harald & Yanagawa, Noriyuki, 1996. "Increasing the capital income tax may lead to faster growth," European Economic Review, Elsevier, vol. 40(8), pages 1521-1540, November.
  14. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  15. Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, vol. 71(1), pages 1-26, January.
  16. Lord, William, 1989. "The transition from payroll to consumption receipts with endogenous human capital," Journal of Public Economics, Elsevier, vol. 38(1), pages 53-73, February.
  17. Haley, William J, 1976. "Estimation of the Earnings Profile from Optimal Human Capital Accumulation," Econometrica, Econometric Society, vol. 44(6), pages 1223-38, November.
  18. Pecorino, Paul, 1993. "Tax structure and growth in a model with human capital," Journal of Public Economics, Elsevier, vol. 52(2), pages 251-271, September.
  19. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
  20. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  21. Jones, Larry E. & Manuelli, Rodolfo E. & Rossi, Peter E., 1997. "On the Optimal Taxation of Capital Income," Journal of Economic Theory, Elsevier, vol. 73(1), pages 93-117, March.
  22. Nerlove, Marc & Razin, Assaf & Sadka, Efraim & von Weizsacker, Robert K., 1993. "Comprehensive income taxation, investments in human and physical capital, and productivity," Journal of Public Economics, Elsevier, vol. 50(3), pages 397-406, March.
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Cited by:
  1. Echevarría Olave, Cruz Angel, 2003. "Life Expectancy, Schooling Time and Endogenous Growth," DFAEII Working Papers 2002-11, University of the Basque Country - Department of Foundations of Economic Analysis II.
  2. Echevarria, Cruz A., 2004. "Life expectancy, retirement and endogenous growth," Economic Modelling, Elsevier, vol. 21(1), pages 147-174, January.

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