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Using Human Capital Theory to Establish a Potential Income Tax

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Abstract

There are good arguments for an individual income tax on “potential income”, but the drawback to such a tax is the significant administrative concern regarding the implementation of the tax. 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.A. The paper also suggests that a “potential income tax” is very similar to a “presumptive income tax.” The paper concludes by reviewing some significant problems with the implementation of a potential/presumptive income tax.

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File URL: http://icepp.gsu.edu/sites/default/files/documents/icepp/wp/ispwp0710.pdf
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Bibliographic Info

Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper0710.

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Length: 32 pages
Date of creation: 01 Jun 2007
Date of revision:
Handle: RePEc:ays:ispwps:paper0710

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Keywords: Human Capital; Potential Income Tax; presumptive income tax;

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  1. Mulligan, Casey B & Sala-i-Martin, Xavier, 1995. "A Labour-Income-Based Measure of the Value of Human Capital: An Application to the States of the United States," CEPR Discussion Papers 1146, C.E.P.R. Discussion Papers.
  2. Ahmad,Etisham & Stern,Nicholas, 1991. "The Theory and Practice of Tax Reform in Developing Countries," Cambridge Books, Cambridge University Press, number 9780521265638, October.
  3. 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.
  4. 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.
  5. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, vol. 88(2), pages 289-92, May.
  6. Milka Casanegra de Jantscher & Vito Tanzi, 1987. "Presumptive Income Taxation," IMF Working Papers 87/54, International Monetary Fund.
  7. 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.
  8. Allingham, M. G., 1975. "Towards an ability tax," Journal of Public Economics, Elsevier, vol. 4(4), pages 361-376, November.
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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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