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Using Human-Capital Theory to Establish a Potential-Income Tax

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  • Dagney Faulk
  • Jorge Martinez-Vazquez
  • Sally Wallace

Abstract

There are good arguments for an individual income tax on potential income, but a drawback to such a tax is the significant administrative concern regardingits implementation. This paper argues that human-capital theory provides a widely accepted and straightforward method to estimate potential income using observed characteristics of individuals, and operationalizes this approach using data for the U.S. The paper also suggests that a potential-income tax is verysimilar to a presumptive income tax. The paper concludes by reviewing some significant problems with the implementation of a potential or presumptive income tax.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 63 (2007)
Issue (Month): 3 (September)
Pages: 415-435

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200709)63:3_415:uhttea_2.0.tx_2-e

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Related research

Keywords: presumptive tax; potential-income tax; human capital;

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References

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  1. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, vol. 88(2), pages 289-92, May.
  2. Milka Casanegra de Jantscher & Vito Tanzi, 1987. "Presumptive Income Taxation," IMF Working Papers 87/54, International Monetary Fund.
  3. Richard M. Bird & Sally Wallace, 2003. "Is It Really so Hard to Tax the Hard-to-Tax? The Context and Role of Presumptive Taxes," International Tax Program Papers 0307, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  4. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  5. Mulligan, C. B. & Sala-i-Martin, X., 1997. "A labor income-based measure of the value of human capital: An application to the states of the United States," Japan and the World Economy, Elsevier, vol. 9(2), pages 159-191, May.
  6. Plug, Erik J. S. & van Praag, Bernard M. S. & Hartog, Joop, 1999. "If we knew ability, how would we tax individuals?," Journal of Public Economics, Elsevier, vol. 72(2), pages 183-211, May.
  7. Allingham, M. G., 1975. "Towards an ability tax," Journal of Public Economics, Elsevier, vol. 4(4), pages 361-376, November.
  8. Ahmad,Etisham & Stern,Nicholas, 1991. "The Theory and Practice of Tax Reform in Developing Countries," Cambridge Books, Cambridge University Press, number 9780521397421, April.
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Cited by:
  1. Paul Frijters & David W. Johnston & Michael A. Shields, 2012. "The Optimality of Tax Transfers: What does Life Satisfaction Data Tell Us?," Discussion Papers Series 450, School of Economics, University of Queensland, Australia.

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