Advanced Search
MyIDEAS: Login to save this paper or follow this series

Optimal Taxation of Risky Human Capital

Contents:

Author Info

  • Bas Jacobs
  • Dirk Schindler
  • Hongyan Yang

Abstract

In a model with ex-ante homogenous households, earnings risk and a general earnings function, we derive the optimal linear labor tax rate and optimal linear education subsidies. The optimal income tax trades off social insurance against incentives to work and to invest in human capital. Education subsidies are not used for social insurance, but are only targeted at off-setting the distortions of the labor tax and internalizing a fiscal externality. Both optimal education subsidies and tax rates increase if labor and education are more complementary, since education subsidies indirectly lower labor tax distortions by stimulating labor supply. Optimal education subsidies (taxes) also correct non-tax distortions arising from missing insurance markets. Education subsidies internalize a positive (negative) fiscal externality if there is underinvestment (overinvestment) in education due to risk. Education policy unambiguously allows for more social insurance if education is a risky activity. However, if education hedges against labor market risk, optimal tax rates could be lower than without education subsidies.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-01/cesifo1_wp2529.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2529.

as in new window
Length:
Date of creation: 2009
Date of revision:
Handle: RePEc:ces:ceswps:_2529

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords: labor taxation; human capital investment; education subsidies; idiosyncratic risk; risk properties of human capital;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, Elsevier, vol. 56(2), pages 291-310, February.
  2. Diamond, Peter A & Mirrlees, James A, 1986. " Payroll-Tax Financed Social Insurance with Variable Retirement," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 88(1), pages 25-50.
  3. Anderberg, Dan, 2009. "Optimal policy and the risk properties of human capital reconsidered," Journal of Public Economics, Elsevier, Elsevier, vol. 93(9-10), pages 1017-1026, October.
  4. Bas Jacobs & A. Lans Bovenberg, 2011. "Optimal Taxation of Human Capital and the Earnings Function," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 13(6), pages 957-971, December.
  5. Mikhail Golosov & Narayana R. Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Working Papers, Federal Reserve Bank of Minneapolis 615, Federal Reserve Bank of Minneapolis.
  6. Mikhail Golosov & Aleh Tsyvinski & Ivan Werning, 2007. "New Dynamic Public Finance: A User's Guide," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2006, Volume 21, pages 317-388 National Bureau of Economic Research, Inc.
  7. Christian Belzil & Jörgen Hansen, 2002. "Earnings Dispersion, Risk Aversion and Education," CIRANO Working Papers, CIRANO 2002s-20, CIRANO.
  8. da Costa, Carlos E. & Maestri, Lucas J., 2007. "The risk properties of human capital and the design of government policies," European Economic Review, Elsevier, Elsevier, vol. 51(3), pages 695-713, April.
  9. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 210, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Grochulski, Borys & Piskorski, Tomasz, 2010. "Risky human capital and deferred capital income taxation," Journal of Economic Theory, Elsevier, Elsevier, vol. 145(3), pages 908-943, May.
  11. repec:dgr:uvatin:2005035 is not listed on IDEAS
  12. Bas Jacobs & A. Bovenberg, 2010. "Human capital and optimal positive taxation of capital income," International Tax and Public Finance, Springer, Springer, vol. 17(5), pages 451-478, October.
  13. Bas Jacobs, 2005. "Optimal Income Taxation with Endogenous Human Capital," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 7(2), pages 295-315, 05.
  14. Bovenberg, A.L. & Jacobs, B., 2001. "Redistribution and Education Subsidies are Siamese Twins," Discussion Paper, Tilburg University, Center for Economic Research 2001-82, Tilburg University, Center for Economic Research.
  15. Hans-Werner Sinn, 1995. "Social Insurance, Incentives, and Risk Taking," NBER Working Papers 5335, National Bureau of Economic Research, Inc.
  16. Ignacio Palacios-Huerta, 2003. "An Empirical Analysis of the Risk Properties of Human Capital Returns," American Economic Review, American Economic Association, American Economic Association, vol. 93(3), pages 948-964, June.
  17. Hartog,Joop & Maassen van den Brink,Henriëtte (ed.), 2007. "Human Capital," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521873161.
  18. Kaplow, Louis, 1994. "Taxation and Risk Taking: A General Equilibrium Perspective," National Tax Journal, National Tax Association, vol. 47(4), pages 789-98, December.
  19. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty, Optimal Taxation and the Direct versus Indirect Tax Controversy," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(432), pages 1165-79, September.
  20. Eaton, Jonathan & Rosen, Harvey S., 1980. "Labor supply, uncertainty, and efficient taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 14(3), pages 365-374, December.
  21. von Weizsäcker, Robert K & Wigger, Berthold, 1998. "Risk, Resources and Education," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1808, C.E.P.R. Discussion Papers.
  22. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, Elsevier, vol. 14(1), pages 49-68, August.
  23. Louis Kaplow, 1991. "Taxation and Risk Taking: A General Equilibrium Perspective," NBER Working Papers 3709, National Bureau of Economic Research, Inc.
  24. Hamilton, Jonathan H, 1987. "Optimal Wage and Income Taxation with Wage Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 373-88, June.
  25. Anderberg, Dan & Andersson, Fredrik, 2003. "Investments in human capital, wage uncertainty, and public policy," Journal of Public Economics, Elsevier, Elsevier, vol. 87(7-8), pages 1521-1537, August.
  26. repec:dgr:uvatin:2005036 is not listed on IDEAS
  27. Levhari, David & Weiss, Yoram, 1974. "The Effect of Risk on the Investment in Human Capital," American Economic Review, American Economic Association, American Economic Association, vol. 64(6), pages 950-63, December.
  28. Feldstein, Martin S, 1972. "Distributional Equity and the Optimal Structure of Public Prices," American Economic Review, American Economic Association, American Economic Association, vol. 62(1), pages 32-36, March.
  29. Gould, Eric D & Moav, Omer & Weinberg, Bruce A, 2001. " Precautionary Demand for Education, Inequality, and Technological Progress," Journal of Economic Growth, Springer, Springer, vol. 6(4), pages 285-315, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Dan Anderberg, 2008. "Optimal Policy and the Risk Properties of Human Capital Reconsidered," CESifo Working Paper Series 2451, CESifo Group Munich.
  2. C. Mendolicchio & D. Paolini & T. Pietra, 2010. "Income taxes, subsidies to education, and investments in human capital," Working Papers 701, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Mendolicchio, Concetta & Paolini, Dimitri & Pietra, Tito, 2012. "Asymmetric information and overeducation," IAB Discussion Paper, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany] 201214, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  4. Robin Boadway & Motohiro Sato, 2011. "Optimal Income Taxation with Uncertain Earnings: A Synthesis," CESifo Working Paper Series 3654, CESifo Group Munich.
  5. Findeisen, Sebastian & Sachs, Dominik, 2011. "Education and Optimal Dynamic Taxation," IZA Discussion Papers 6056, Institute for the Study of Labor (IZA).
  6. Sebastian Findeisen & Dominik Sachs, 2011. "Education and optimal dynamic taxation: The role of income-contingent student loans," ECON - Working Papers, Department of Economics - University of Zurich 040, Department of Economics - University of Zurich, revised Sep 2012.
  7. Bas Jacobs & Hongyan Yang, 2013. "Second-Best Income Taxation with Endogenous Human Capital and Borrowing Constraints," CESifo Working Paper Series 4155, CESifo Group Munich.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_2529. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.