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Optimal Taxation of Human Capital and Credit Constraints


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  • Bas Jacobs

    (Faculty of Economics and Econometrics, University of Amsterdam)


We study optimal linear income taxation in a model with heterogeneous agents where earnings potentials are endogenously determined through human capital accumulation. Agents differ in initial conditions and ability to learn. Capital market imperfections prevent poor agents to invest optimally in human capital. We show that optimal linear tax rates on human capital are positive, even in absence of redistributive preferences of the government. A more progressive tax system has efficiency gains because credit constraints are relaxed. Numerical calculations show that optimal linear tax rates are significantly increased when capital market imperfections are present.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 02-044/2.

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Date of creation: 13 May 2002
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Handle: RePEc:dgr:uvatin:20020044

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Keywords: optimal linear taxation; human capital; credit constraints;

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Cited by:
  1. Frederick van der Ploeg, 2004. "The Welfare State, Redistribution and the Economy, Reciprocal Altruism, Consumer Rivalry and Second Best," CESifo Working Paper Series 1234, CESifo Group Munich.


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