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Human Capital and Optimal Positive Taxation of Capital Income

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Author Info
Bovenberg, A Lans
Jacobs, Bas

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Abstract

This paper analyzes optimal linear taxes on capital and labour incomes in a life-cycle model of human capital investment, financial savings, and labour supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labour income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labour tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labour income if savings are elastic compared to investment in human capital; substitution between inputs in human capital formation is difficult; and most investments in human capital are verifiable. Numerical calculations suggest that the optimal marginal tax rate on capital income is close to the tax rate on labour income.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5047.

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Date of creation: May 2005
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Handle: RePEc:cpr:ceprdp:5047

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Related research
Keywords: capital income taxation; education subsidies; human capital; labour income taxation; life cycle;

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Find related papers by JEL classification:
H2 - Public Economics - - Taxation, Subsidies, and Revenue
H5 - Public Economics - - National Government Expenditures and Related Policies
I2 - Health, Education, and Welfare - - Education
J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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References listed on IDEAS
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    Other versions:
  2. Attanasio, Orazio P., 1999. "Consumption," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 11, pages 741-812 Elsevier. [Downloadable!] (restricted)
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  6. Michael J. Boskin, 1975. "Notes on the Tax Treatment of Human Capital," NBER Working Papers 0116, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Lans Bovenberg, A. & Jacobs, Bas, 2005. "Redistribution and education subsidies are Siamese twins," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2005-2035, December. [Downloadable!] (restricted)
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  9. Stephen V. Cameron & James J. Heckman, 2001. "The Dynamics of Educational Attainment for Black, Hispanic, and White Males," Journal of Political Economy, University of Chicago Press, vol. 109(3), pages 455-499, June. [Downloadable!] (restricted)
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  11. Bernheim, B. Douglas, 2002. "Taxation and saving," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 18, pages 1173-1249 Elsevier. [Downloadable!] (restricted)
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  12. Heckman, James J, 1976. "A Life-Cycle Model of Earnings, Learning, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S11-44, August. [Downloadable!] (restricted)
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  19. Ashenfelter, O. & Harmon, C. & Oosterbeek, H., 1999. "A Review of Estimates of the Schooling/ Earnings Relationship, with tests for Publication Bias," Papers 99/20, College Dublin, Department of Political Economy-.
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  20. Aiyagari, S Rao, 1995. "Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1158-75, December. [Downloadable!] (restricted)
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  21. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Johann K. Brunner & Susanne Pech, 2005. "Optimum Taxation of Life Annuities," Economics working papers 2005-06, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
    Other versions:
  2. Wolfram F. Richter, 2006. "Taxing Human Capital Efficiently: The Double Dividend of Taxing Non-Qualified Labour More Heavily Than Qualified Labour," IZA Discussion Papers 2328, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Peter Birch Sørensen, 2006. "Can Capital Income Taxes Survive? And Should They?," EPRU Working Paper Series 06-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  4. Volker Grossmann & Panu Poutvaara, 2006. "Pareto-Improving Bequest Taxation," IZA Discussion Papers 2277, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. Peter Birch Sørensen, 2006. "Can Capital Income Taxes Survive? And Should They?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Schindler, Dirk, 2008. "Human Capital, Multiple Income Risk and Social Insurance," Discussion Papers 2008/18, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
  7. Bas Jacobs & Dirk Schindler & Hongyan Yang, 2009. "Optimal Taxation of Risky Human Capital," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  8. Casper Ewijk & Bas Jacobs & Ruud Mooij, 2007. "Welfare Effects of Fiscal Subsidies on Home Ownership in the Netherlands," De Economist, Springer, vol. 155(3), pages 323-336, September. [Downloadable!] (restricted)
  9. Geir Haakon Bjertnæs, 2006. "Income Taxation, Tuition Subsidies, and Choice of Occupation," Discussion Papers 459, Research Department of Statistics Norway. [Downloadable!]
  10. Richter, Wolfram F., 2008. "Efficient Tax Policy Ranks Education Higher Than Saving," IZA Discussion Papers 3451, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  11. Bas Jacobs & Lans Bovenberg, 2008. "Optimal Taxation of Human Capital and the Earnings Function," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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This page was last updated on 2009-11-25.

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