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Taxation and human capital accumulation with endogenous mortality

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  • Debajyoti Chakrabarty

    (Charles Darwin University)

Abstract

We study the impact of taxation on human capital when the mortality of household agents is endogenously determined based on their past levels of consumption. We characterize and solve the dynamic optimization problem facing household agents in the economy. Even though all households in our economy have identical preferences and have access to the same human capital accumulation technology, with endogenous mortality, there is a possibility of multiple equilibria. Households with an initial endowment of human capital above a threshold choose to accumulate human capital, while those below the threshold end up with very low levels of human capital. We use empirical estimates of the income–mortality relationship in Canada, France, and the US to simulate our model. When income has a strong protective effect against mortality, we find that multiple equilibria are empirically plausible. Our simulations suggest that changes in proportional tax rates have more than twice the impact on aggregate human capital in the endogenous mortality model compared to the infinite horizon model.

Suggested Citation

  • Debajyoti Chakrabarty, 2022. "Taxation and human capital accumulation with endogenous mortality," The Japanese Economic Review, Springer, vol. 73(4), pages 555-596, October.
    • Handle: RePEc:spr:jecrev:v:73:y:2022:i:4:d:10.1007_s42973-020-00071-7
    DOI: 10.1007/s42973-020-00071-7
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    More about this item

    Keywords

    Endogenous mortality; Inter-temporal choice; Human capital; Taxation;
    All these keywords.

    JEL classification:

    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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